The most important news in the market this week is the Euro Crisis and Central Bank policies in the United States. While the Euro Crisis is important, the fact that the monetary union compromises of 17 member nations makes any prediction challenging. Unlike the Euro Zone, the United States is an integrated economy and monetary policy is conducted by the Federal Reserve with almost total autonomy. Not only does this free the Central Bank from political biases, but it allows the central bank to move solely based on current economic situations. The big question is if the Federal Reserve is going to initiate Quantitative Easing (QE) this month or not.

The latest job growth, manufacturing and unemployment data were far worse than predicted and the hope that economic growth would gain momentum has been shattered. Problems in the Euro Zone, a main trade partner of United States, have started affecting the United States which had remained seemingly immune throughout 2011 and 2012. The past week saw many market analysts and major bankers express their view on what the FOMC meeting on June 19^th will decide. The majority opinion is that QE is necessary to revive the economy at this point. Most people who disagree with QE as a solution point that printing additional money does not necessarily promote growth and tends to fuel inflation.

The Federal Reserve is aware of this, but understands that despite bench mark interest rates close to zero, inflationary pressure has been non-existent.  Also, the U.S dollar is at an all time high, and at a time when the manufacturing index has fallen, a strong dollar is unlikely to help exported oriented businesses. Although a weak dollar does adds inflationary pressure considering that the United States is a net importer, with the Yuan and Euro weakening due to the bad business climate, a weaker dollar might not add inflationary pressure in the short run.

The most convincing argument however is both historical and situational. Historically, post 2008 crisis saw the Federal Reserve buy back almost $2.3 trillion dollars worth of long-term bonds and the economic outlook improved. Ignoring inflationary and long term fears, QE is almost certain to boost growth in the short to medium term. In the current context, no one is sure when the Euro Zone will fix their problem and QE will act as a barrier against the turmoil until things get better. Ben Bernanke, chairman of the Federal Bank, is scheduled to give his views today. Yesterday Vice-chairman Janet Yellen strongly hinted that monetary easing is necessary. Expectations have built up in the market to such an extent that if the Federal Government does not initiate QE, markets are sure to crash. Given these conditions, yes, this writer thinks that is going to happen just because the Federal Government HAS to do something. QE has worked in the past, so why not again?

Note: The blog is just an expression of the author’s opinion and cannot be deemed responsible for any losses incurred.