By Nieves Amigo
Date: Thursday 21 Jun 2012
European equity markets have reacted to the Federal Reserve's (Fed) latest monetary policy action with losses as many investors believe that the Fed is not doing enough to get the economy going.
On top of that, the decision by the Fed to lower its 2012 gross doemstic product (GDP) forecast and raise its outlook for the unemployment rate has not helped sentiment.
The analyst consensus was already expecting the Federal Reserve to extend the now famous "Operation Twist". The Fed met that expectation but disappointed a few others who were looking for a new round of quantitative easing ("QE3") or an extension to the timeline for exceptionally low rates. Following the latest Fed decision, a survey by the Reuters news agency reveals that analysts are weighing in a 50% chance of a QE3 by the end of the year. Citi strategist Jose Luis Martinez Campuzano believes that the unemployment figures will be what ultimately triggers that decision.
Several analysts feel that not enough has been done. "He gave a rather sombre outlook and then when asked 'why aren't you doing something about it?' he didn't have a solid answer," said Art Cashin, director of floor operations at UBS.
"There is too much uncertainty not to extend Operation Twist," said Mesirow Financial chief economist Diane Swonk.
In typical "Fedspeak" fashion, analysts have focused on the subtle changes made to the Fed statement. This time, the Fed said it was "prepared to take further action" replacing the comment that it would "regularly review the size and composition of its securities."
"Those were strong words," said LPL Financial economist John Canally. "It’s like saying one more weak report, one more hiccup in Europe, one more something, and they’re ready to go."
Reuters contributor Felix Salmon suggested that there is not a big difference between the Ben Bernanke at Wednesday’s conference and the Mohamed El-Erian that criticises his decisions. "Both of them say that Fed action at this point is a second-best solution to the economic problems facing the US: what we really need — and aren’t going to get — is fiscal, not monetary, stimulus."
"Bernanke got quite a few questions today asking why he wasn’t being more aggressive; certainly extending Operation Twist by a few months is unlikely in and of itself to make much of a noticeable difference to anything," Salmon explained.
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