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7 Sep 2013
What about the Fed and Syria?
FXstreet.com (Chicago) – The most recent economic results in the United States indicate the economy may not be ready for a reduction in bond purchases as the nonfarm payroll failed to meet expectations at 180K to settle for 169K. Although unemployment decreased to 7.3%, lowest level in several years, the percentage remains high. Ahead of the Federal Reserve meeting next September 17th and 18th, other known unknowns such as the Syrian conflict intensify the tensions among market participants.
Understanding systems dynamics
After the global crisis of 2008, the United States is still on the road to recovery. Despite recently released outperforming data based on expectations, facts demonstrate the results are “modest” and there is a lot of work to do to have the economy back up and running again. The main goals for the Federal Reserve are thus to maintain long-term and short-term interest rates low to bolster consumption and investing and eventually encourage economic growth. The message the Fed will be sending to not only the country but the world, if tapering happens, is clear: the state of the economy is healthier. But when empiric data does not match discourses, the lag and disconnect between words and actions can not only be detrimental for the markets, but also the legitimacy of the monetary policies implemented. Therefore, the uncertainty and worries triggered by such decisions can be often exaggerated or underestimated. On one extreme there are those that believe that the Fed’s decision and execution when tapering is meaningless as it has been said that one-month buying can only do too little to affect the reduction of long-term interest rates (impact accounting for a few hundredths of percentage points). On the other, there are those who insist on the nature of the message and the implications of a bond-buying program reduction: potential market participants’ reaction to raise back interest rates which could hinder the economy considerably.
How much is enough?
FXstreet.com Chief Analyst Valeria Bednarik states that the data is not enough to start tapering but the reduction will happen anyway. Thus, “the question is no longer when, but for how much”. She adds that “the ultra doves Evans and Kocherlakota, said the same thing these past couple of days” referring to the willingness displayed by Fed officials to stay open minded after the Federal Reserve Bank of Chicago President, Charles Evans, stated that ““I’m going to go in [to the meeting] with an open mind. I can be persuaded”. At the moment, equities markets react positively to uncertainty and indecision while yields remain low, favoring the Central Bank’s decision to taper.
Syrian tensions
In the meantime, in terms of international geopolitical dynamics, the Syrian conflict remains a center of attention for markets worldwide. The most recent comments on behalf of the Russians imply a clear stance against the US if the country decides to intervene in the Middle Eastern nation. Vladimir Putin, head official in the country, had called US Secretary of State a liar as no clear proofs have been provided involving President Bashar Al-Assad’s use of chemical weapons. US president, Barack Obama, said that “each member of Congress is going to have to decide if [they] think it's the right thing to do for America's national security and the world's national security," He added that "ultimately, you listen to your constituents, but you've got to make some decisions about what you believe is right for America." Congress is to vote on the military strike this incoming Tuesday.
Understanding systems dynamics
After the global crisis of 2008, the United States is still on the road to recovery. Despite recently released outperforming data based on expectations, facts demonstrate the results are “modest” and there is a lot of work to do to have the economy back up and running again. The main goals for the Federal Reserve are thus to maintain long-term and short-term interest rates low to bolster consumption and investing and eventually encourage economic growth. The message the Fed will be sending to not only the country but the world, if tapering happens, is clear: the state of the economy is healthier. But when empiric data does not match discourses, the lag and disconnect between words and actions can not only be detrimental for the markets, but also the legitimacy of the monetary policies implemented. Therefore, the uncertainty and worries triggered by such decisions can be often exaggerated or underestimated. On one extreme there are those that believe that the Fed’s decision and execution when tapering is meaningless as it has been said that one-month buying can only do too little to affect the reduction of long-term interest rates (impact accounting for a few hundredths of percentage points). On the other, there are those who insist on the nature of the message and the implications of a bond-buying program reduction: potential market participants’ reaction to raise back interest rates which could hinder the economy considerably.
How much is enough?
FXstreet.com Chief Analyst Valeria Bednarik states that the data is not enough to start tapering but the reduction will happen anyway. Thus, “the question is no longer when, but for how much”. She adds that “the ultra doves Evans and Kocherlakota, said the same thing these past couple of days” referring to the willingness displayed by Fed officials to stay open minded after the Federal Reserve Bank of Chicago President, Charles Evans, stated that ““I’m going to go in [to the meeting] with an open mind. I can be persuaded”. At the moment, equities markets react positively to uncertainty and indecision while yields remain low, favoring the Central Bank’s decision to taper.
Syrian tensions
In the meantime, in terms of international geopolitical dynamics, the Syrian conflict remains a center of attention for markets worldwide. The most recent comments on behalf of the Russians imply a clear stance against the US if the country decides to intervene in the Middle Eastern nation. Vladimir Putin, head official in the country, had called US Secretary of State a liar as no clear proofs have been provided involving President Bashar Al-Assad’s use of chemical weapons. US president, Barack Obama, said that “each member of Congress is going to have to decide if [they] think it's the right thing to do for America's national security and the world's national security," He added that "ultimately, you listen to your constituents, but you've got to make some decisions about what you believe is right for America." Congress is to vote on the military strike this incoming Tuesday.