Washington: Federal Reserve officials may immediately strengthen their commitment to record monetary stimulus after a faltering economic recovery and a US credit-rating cut provoked a rout in global stocks.
Chairman Ben S. Bernanke and his colleagues are weighing the use of more untested policy tools after two rounds of bond buying totalling $2.3 trillion (Dh8.4 trillion) failed to spur sufficient economic growth and reduce unemployment below nine per cent.
The Federal Open Market Committee held its regular meeting Tuesday in Washington following the worst day for US stocks since December 2008.
"The odds of more dramatic action are higher," said Vincent Reinhart, a former chief monetary policy strategist at the Fed. "However, they might not want to be seen as responding so directly to equity prices," Reinhart said, adding that policy makers may wait to signal a new round of bond purchases until Bernanke gives a speech on August 26 at a Fed conference in Wyoming.
Reinhart is a resident scholar at the American Enterprise Institute in Washington.
Julia Coronado, chief economist for North America for BNP Paribas in New York, said the central bank may say the economic slowdown is persisting longer than expected. Policy makers may also say the Fed's securities portfolio will remain at a record for an "extended period" and replace shorter-term securities with longer maturities to reduce rates on longer-term debt, she said.
The Fed reiterated in June that the overnight interbank lending rate would be "exceptionally low" for an "extended period" and said the policy of reinvesting maturing securities to keep the balance sheet steady would be maintained, without saying how long.
The drop in global stocks, further fuelled by concerns over Europe's debt crisis, adds to pressure on the Fed. The Financial Stability Oversight Council, which is chaired by Treasury Secretary Timothy F. Geithner and also includes Bernanke, convened by teleconference on Monday afternoon, according to a government official who declined to be named because he wasn't authorised to discuss the matter.
The Fed is likely to start a third round of asset purchases, and "they certainly should do something right away," said Kenneth Rogoff, a Harvard University economics professor and former Fed researcher who attended graduate school with Bernanke. It's not clear if Bernanke would have the support of the Federal Open Market Committee, Rogoff said.
European crisis
"It's going to move more decisively" than in the first two rounds, Rogoff said in an interview with Bloomberg Television. He recommended the Fed to say it's trying to create "moderate inflation" and avoid repeating that officials are trying to boost stocks.
Such a step may backfire because it could panic investors by signalling the economy is in worse shape than the Fed thought, said Lynn Reaser, chief economist at Point Loma Nazarene University in San Diego, California, and a board member of the National Association for Business Economics.
Gulf markets down
Regional stock markets followed global cues Tuesday with every exchange in the Gulf posting losses. Saudi Arabia's Tadawul All Share Index, the Arab world's most liquid bourse, and the Dubai Financial Market both hit five month lows, as did Qatar and Abu Dhabi's measures.
Dubai's index fell two per cent to its lowest close since March 9 and Abu Dhabi's benchmark dropped 1.3 per cent to its lowest close since March 8. The debt crises in the United States and the Eurozone continue to act as the main catalysts for the region amid thin local news flow.
Egyptian shares led the regional decline, dropping 4.8 per cent to a new two-year low. All 30 firms on the index fell, with financial firm Pioneers Capital dropping 6.1 per cent and Orascom Telecom losing 3.2 per cent. Oman's index lost 1.8 per cent, crossing a two-year low, Bahrain's bourse slipped 0.73 per cent and Kuwait's index dropped 1.25 per cent.
What's next?Regional markets are likely to follow global trends in the short term, but historically have returned to focus on local issues once markets start to move back into positive territory.
Oil $5 down
Brent Crude stared off the day falling as much as $5 to $98.74 a barrel, the lowest intraday price since February 8. It later recovered to $104.93, up $1.19 by 1250 GMT in volatile trade. It was still well over $20 off an April peak above $127.
The rise was attributed to the strong opening of US markets and anticipation that the Federal Reserve Chairman Ben Bernanke may announced plans for QE3.
What's next?The overall picture continued to be very bearish, with OPEC cutting its forecast for global oil demand growth this year. The Organization of the Petroleum Exporting Countries, in a monthly report, also said the group's own production had surged to more than 30 million barrels per day, an increase that comes just as the economic outlook is weakening.
Global markets +$1.3tr down
Asian stock extended losses Tuesday as investors scrambled to readjust their positions in the aftermath of the United States' credit downgrade and deepening concern that the Eurozone's sovereign debt crisis could spread to financial heavyweights Spain and Italy.
Tokyo's Nikkei closed down 1.7 per cent, having been down more than four per cent at one stage, and MSCI's broadest index of Asia Pacific shares excluding Japan was down 1.9 per cent, after tumbling more than six per cent earlier.
US and European equities rebounded Tuesday after being routed earlier this week. US stocks rose at the open on Wall Street whilst European shares rallied from a two-year low with the benchmark Stoxx Europe 600 Index snapping a seven-day losing streak.The UK's FTSE 100 climbed 1.2 per cent and France's CAC 40 increased one per cent. Germany's DAX Index slid 0.66 per cent.
The Global stock market sell-off wiped out more than $1.35 trillion in investor wealth worldwide by a 5.2 per cent drop in the MSCI World Index.
What's next? Stocks may strengthen further on investor hopes that the US Federal Reserve will announce moves to boost the economy, although disappointment could lead to new losses.
Gold $1.778/oz
Gold hit a record $1,778 (Dh 6530.4) an ounce Tuesday, its biggest three-day rally since the depths of the financial crisis in late 2008.The yellow metal has risen by about eight per cent this month, driven by investors seeking to escape equities, bonds and currencies. Spot gold was $1,769.90 an ounce at 5:30am US eastern time, up 3.2 per cent on the day.
What's next? With uncertainty about the global economy still running high, analysts expect gold prices to continue to rise with some speculating the precious metal could cross the $2,000 threshold. "The ingredients are all in place for a stronger gold price, as the metal is not subject to the risk of intervention or quantitative easing," said UBS in a note.
