Soothing moves by IMF, Fed bring calm to markets
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The European debt crisis continues to monopolise market attention, but the recent G20 meeting at which a more satisfying outcome was finally achieved can restore market confidence.
The International Monetary Fund bucked expectations by raising more than US$430 billion from leading countries (initial forecasts were for $300-400 billion), to increase its lending capacity. The majority of the money came from the euro-zone with around $200 billion pledged, while Japan added $60 billion, the UK $15 billion and Switzerland $10 billion. Furthermore, the IMF said these resources would be available for the whole of the IMF membership and not earmarked for any particular region. Since the start of global financial crisis in 2007, the IMF has committed more than $300 billion in loans to its member countries.
The Federal Reserve Bank of America has also launched several important actions in response to the crisis. Its attempts to boost recovery began in December 2008 with a cut to the Fed Fund rate target of 0-0.25 per cent, followed by a $100-billion purchase programme for agency bonds and a $500-billion purchasing programme for mortgage-backed securities – now collectively known as Quantitative Easing (QE I). In March 2009, the Fed decided to extend the size of the bond purchasing programme by about $1.5 trillion within the framework of QE I.
But despite the implementation of QE I, US economic growth slowed, pressuring the Fed to announce an additional $600 billion for Treasury purchases (aka QE II) in November 2011. After QE II, the Fed attempted to keep its balance sheet unchanged, and implemented “Operation Twist” in September 2011, in which it began to buy back long-term Treasuries and sell the same amount in new short-term Treasuries.
Amid a raft of US economic data pointing to uncertainty and suggesting growth may be unsustainable, market attention turned towards the Fed’s policy meeting held this week.
In yesterday’s statement after the two-day meeting, a cautiously optimistic Fed said moderate economic growth meant it would hold off taking further steps to boost the recovery. As a result “Operation Twist” will finish as scheduled in June. Asian markets edged up yesterday, buoyed by the news from the Fed. Global market attention is now, once again, firmly fixed on Europe.
Duangkamon Phunkaew is a senior dealer in the Treasury Division of Bangkok Bank.
