The Federal Reserve’s decision to keep printing dollars at an unchanged rate, mirrored by the Bank of Japan sticking with its massive stimulus programme, should have surprised nobody.
But markets seem marginally discomfited, interpreting the Fed’s statement as sounding a little less alarmed about the state of the U.S. recovery than some had expected and maybe hastening Taper Day. European stocks are expected to pull back from a five-year high but this is really the financial equivalent of “How many angels can dance on the head of a pin”. The Fed’s message was little changed bar removing a reference to tighter financing conditions.
However, the top central banks have sent a signal that they think all is not yet well with the world – the Fed, BOJ, European Central Bank, Bank of England, Bank of Canada and Swiss National Bank have just announced they will make permanent their array of currency swap arrangements to provide a “prudent liquidity backstop” indefinitely.
On the liquidity front, ECB policymaker Ewald Nowotny has stated that more will be made available to euro zone banks as the more than 1 trillion euros of cheap long-term loans issued late in 2011 and 2012 expire. He didn’t specify what that would entail. ECB board members Carlos Costa and Erkki Liikanen are speaking later.
We reported earlier this week that there are three trains of thought within the ECB about what policy move, if any, to make next. Some policymakers want to consider an interest rate cut, some to keep the option open of another long-term liquidity splurge for the banks a la last year’s LTRO and others in the “core” euro zone don’t want any policy shift at all. Nowotny has said there is not much that can be done to curb a resurgent euro.