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Both the European Central Bank and the Federal Reserve are set to ramp up easing measures, if not right away then in the near future.That’s the view Morgan Stanley analysts Evan Brown and Gabriel de Kock take in a recent investor note.
The Federal Open Market Committee and the ECB will make monetary policy decisions next week, on Wednesday and Thursday, respectively.
The ECB could cut rates right away. They write:
The ECB…will have to act soon as economic data and credit availability deteriorate. A rate cut next week, and/or a press conference preparing the groundwork for a forceful easing should lower EMU rate expectations, capping EUR upside into year-end.
They also believe new Fed easing measures are in the works, with a series of dovish Fed papers and speeches signaling that QE is indeed being considered. However, there are significant impediments to renewed easing, which will probably delay policy any significant action.
In the last week, Fed speakers reopened the debate on QE3 by proposing renewed MBS purchases to stimulate the US economy. Yet, we do not expect an FOMC balance sheet expansion next week, or by year-end…
We believe MBS purchases are some ways down the road, possibly in early 2012. The FOMC is fully aware that MBS purchases to lower mortgage rates would have little impact on economic activity while many households are unable to refinance. The hurdles for renewed Fed balance sheet expansion, which would light a political firestorm, remain high. Thus, the cost-benefit of MBS purchases may remain unattractive unless the Administration and regulatory agencies expand this week’s HARP initiative to unclog mortgage refinancing.
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