Fed joins stimulus party as global trade slumps

The US Federal Reserve in Washington DC Photo: REUTERS

All three major blocs of the world economy have shifted gears dramatically over the last month, preparing a fresh blast of stimulus to combat the sharpest contraction in global trade since the 2008-09 crisis. 

 By Ambrose Evans-Pritchard

 

The US Federal Reserve appears poised for a third round of quantitative easing (QE) as soon as early September, joining Europe and China in concerted global stimulus.

The Fed’s latest minutes show broad support for fresh bond purchases – probably mortgage bonds – unless signs of “substantial and sustainable strengthening” emerge soon. Paul Ashworth from Capital Economics said QE3 looks like a “done deal” since little is likely to change between now and the next Fed meeting.

The shift in Fed policy caught markets by surprise and comes after the European Central Bank’s chief Mario Draghi opened the door to potentially “unlimited” purchases of Italian and Spanish bonds to prevent a euro break-up.

The most radical moves appear likely from China where the managed “soft-landing” risks spinning out of control, with exports contracting on a month-to-month basis over the summer.

“People should worry less about Europe right now and look more closely at Asia,” said Hans Redeker, currency chief at Morgan Stanley. “We think the Bernanke and Draghi 'puts’ will drive a further rally in global equities. But China represents the biggest risk to our bullish asset call.”
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