ASB Business Weekly
Early Wednesday NZ time the US Federal Reserve is scheduled to make its next policy announcement. With the Fed Funds target rate already down to 1%, the traditional monetary policy lever is already near its limits. It is now time for the Fed to get more imaginative with other monetary options to stimulate the imploding US economy. So, whilst there might be a modest drop in the Fed Funds target, the focus will be on what other measures the Fed announces. Increasingly the Fed is moving to what is referred to as quantitative easing: expansion of the money supply.
One possibility for the Fed is announcing an intention for further purchases of assets such as Treasury bonds or the bonds of ‘agencies’ such as Fannie Mae or Freddie Mac. Such measures, aside from providing an avenue for the Fed to ‘print’ money, can help to drive down longer-term interest rates underpinning the financing of mortgages and corporates. Down the track it is also possible the Fed adopts a zero interest rate policy, as Japan did in the late 1990s. By announcing an intention to keep official interest rates near zero for an extended period, the Fed might influence long-term interest rates to fall. But whatever the Fed does in the months ahead, it will involve pragmatic moves to get money flowing to places it is most desperately needed.
Understandably, local markets will remain firmly glued to what is happening offshore. On top of the Federal Reserve announcement, equity and currency markets will also be influenced by the will they/won’t they nature of proposals to bail out the US big 3 automakers. A proposed rescue package made it through Congress but ran into difficulties in the Senate. However, the Bush administration has raised the possibility of diverting TARP funds to the automakers. And in a bizarre twist a $US50 billion ‘Ponzi’ scheme got revealed: a US money manager admitted he had been using fresh fund inflows to pay high returns to existing investors.
Locally much of the news is second tier. On Thursday updated fiscal accounts are released, and will likely look bleak. Business Outlook, also released on Thursday (likely to remain very weak), will be followed by migration data on Friday. Next Monday’s current account deficit may come in for a little more attention in a world in which external vulnerabilities are more under the microscope. The annual deficit is likely to get bigger through an unfortunate combination of weaker export earnings, high prices for imports, soft earnings from offshore investments, and higher debt-servicing costs.
ASB Bank
