America turns off the money taps - as China stalls and the eurozone risks going backwards
New York (Oct 26) There is growing unease as the US central bank prepares to turn off its printing presses. Over five years the Federal Reserve has pumped almost $4.5 trillion into the US economy, in a desperate effort to counter the effects of recession and the collapse of hundreds of banks following the financial crash.
Next week the Federal Reserve chief Janet Yellen will allocate the last tranche of new money, having wound down from a regular $85bn of quantitative easing (QE) a month to a final $15bn .
Some analysts believe the decision to stop the extra spending is a reflection of the US economy's robust recovery. Falling unemployment, a return to health across the banking sector and consistently strong manufacturing growth all conjure thoughts of a return to pre-recession normality.
Given the huge amounts of money that poured into the US stock market last year, triggering a rise in the S&P 500 of almost 30%, most investors thought the same. But they have proved more cautious in 2014, restricting the S&P 500 to a 6% increase so far.
Disturbed by the lack of similar action in Brussels and in Frankfurt - home of the European Central Bank - investors fear that the eurozone is sliding ever closer to recession. They are also worried about a sharp slowdown in China , following moves by the ruling People's party to tackle escalating state sector debts.
Wild price swings in global stock markets earlier this month were a signal that investors remain ready to pull their funds at a moment's notice.
In this febrile atmosphere, the Fed's next move could be crucial. Yellen appears ready to maintain the $4 .5tn cache of bonds and mortgage-backed securities that make up the bulk of the Fed's balance sheet. As the bonds mature, she will buy new ones to keep the balance steady. But she may be edging away from raising interest rates from 0.25%, a move pencilled in by many economists for February.
There was a time when it appeared that the US and UK would both raise rates in concert, and February was the chosen date. A downturn in the UK's growth outlook has scuppered that idea. But the US economy may be suffering the same malaise. Manufacturing figures last week showed the sector expanding at a much slower rate than just a few months ago.
Midterm elections next month could see the Democrats lose control of the Senate and break an uneasy truce over economic policy. So the Fed may be only be a few meetings away from declaring that the US needs more QE and find itself delaying a rise in rates. More cheap money would cheer stock market investors.
If ECB chief Mario Draghi could persuade the Germans to let him spend some money buying Greek and Spanish debt, that would cheer investors even more. Much of the growth in recent years has followed explicit commitments from central bankers to underwrite the debts of governments.
German chancellor Angela Merkel refuses to accept that the ECB is the central bank for Madrid or Athens , arguing that it has a broader purpose, but she may find herself overruled by the rest of the currency club, frantic at Berlin's stubbornness.
Figures next month are expected to show the eurozone contracting in the third quarter following stagnation in the second. Eventual ECB action looks inevitable.
Anything less then the full bazooka from Draghi will be deemed a disappointment. Even if Japan allows its central bank to spend money, the combined impact of a weak response in Europe , a tightening by Beijing and stasis in the US could send the world somersaulting towards another crisis.