The world's top central bankers have saidthey're willing to rescue the economies of Europe and the United States. Thisweek we'll find out if they are ready to act.
The Federal Reserve wraps up its two-day policy meeting Wednesday. Chairman BenBernanke has pledged to act if unemployment stays high. The European CentralBank meets Thursday — a week after ECB President Mario Draghi vowed to "dowhatever it takes" to save the European common currency, the euro.
"The pressure is building," says Scott Wren, senior equity strategistat Wells Fargo. "It is now a game of wait and see for the financialmarkets."
Investors are hoping the Fed and ECB will announce plans to flood markets withcash through large-scale bond purchases. But economists caution that the hopesmight be dashed. The Fed might not be in a hurry to act. And investors might beexpecting more of Draghi than he can deliver.
Economies on both sides of the Atlantic need help. Unemployment in the 17countries that use the euro remained at a record 11.2 percent in June, theEuropean Union reported Tuesday. The International Monetary Fund expects theeurozone economy to shrink 0.3 percent this year.
The U.S. government announced last week that the American economy grew at alistless 1.5 percent annual pace from April through June, even slower than the2 percent rate in the first three months of the year. On Friday, the LaborDepartment will reveal just how bad the American job market is. Economistsexpect the unemployment rate remained at 8.2 percent for the third straightmonth in July and that the economy generated just 100,000 jobs, not enough tokeep pace with population growth. The first three months of 2012 job growthaveraged more than 225,000 a month.
Still, many economists say the U.S. economy isn't yet weak enough to push theFed to act now. Some good news dribbled in Tuesday: The Conference Board saidconsumer confidence rose in July for the first time in five months. TheCommerce Department said Americans' incomes grew in June at the fastest pace inthree months. And the Standard & Poor's/Case-Shiller home index showed thathome prices rose in May from April in every city the index tracks.
Economists say it's more likely the U.S. central bank will wait until its nextmeeting Sept. 12-13 if they're going to do something. One option, eagerlyawaited by financial markets, is a third round of bond purchases designed topush down long-term interest rates, a policy known as "quantitativeeasing" or QE3. Diane Swonk, chief economist at Mesirow Financial,predicts that the Fed "will stimulate further, but probably not pull thetrigger on QE3 until September."
Economists worry that Fed action won't make much difference anyway: Long-termrates are already at historic lows but haven't done much to spur consumerspending.
The Commerce Department reported Tuesday that consumers spent no more in Junethan they did in May — bad news for an economy that relies on consumer spendingfor 70 percent of output.
But Americans' incomes and savings rose in June, possibly laying the groundworkfor more spending and perhaps stronger economic growth in coming months.
The Standard & Poor's/Case-Shiller home price index released Tuesday showedincreases in all of the 20 cities tracked. And a measure of national pricesrose 2.2 percent from April to May, the second increase after seven months offlat or declining readings.
Phoenix, one of the cities hit hardest by the housing slump, posted thestrongest year-over-year gain in home prices. Still, prices there remain morethan 50 percent below their peak, reached in summer 2006.
The Conference Board said Tuesday that its Consumer Confidence Index increasedto 65.9, from 62.7 in June, the first increase in five months. That's thehighest reading since April and better than the reading of 62 that economistshad expected.
The ECB is under even more pressure than the Fed. The 17 countries that use theeuro are struggling with deepening recessions.
Investors have been demanding record high interest rates on Spanish governmentbonds because they're worried Spain will be overwhelmed by the cost of bailingout its troubled banks and regional governments. That has raised fears thecountry may be the next to seek a bailout from the other eurozone countries,following Ireland, Greece, Portugal and Cyprus. Italy, too, is struggling tocontrol its debts as a stagnant economy pinches tax revenues and drives upspending on unemployment benefits and other social programs. The fear is thatthe pressure will force struggling countries to abandon the euro, somethingthat would rattle financial markets and rock the global economy.
Last Thursday, Draghi sharply raised expectations for more central bank actionwhen he vowed the ECB would do "whatever it takes" to save the17-country euro, and that "believe me, it will be enough." Marketsjumped on the news, expecting that the bank could soon intervene in bondmarkets to drive down the borrowing costs for Spain, Italy and other Europeancountries.
"Stock investors will not let the ECB get away with subtle hints andopaque statements," says Wren of Wells Fargo. "The ECB is under muchmore pressure to give the market what it wants: a statement that says it willstep in and buy the sovereign debt of Spain and Italy."
But economists worry that Draghi might have spoken too boldly and too soon.
The ECB's founding treaty requires the central bank to fight inflation firstand only then to pursue other goals, such as stimulating economic growth. Bycontrast, other central banks, such as the U.S. Federal Reserve and the Bank ofEngland, have broader crisis-fighting powers.
Jonathan Loynes, chief European economist at Capital Economics in London, saysDraghi's remarks last week were a "pretty strong signal" the bankmight intervene in government bond markets with limited purchases aimed atlowering countries' borrowing costs, as it has before on a limited basis.Markets, however, appear to hope for that plus more, a comprehensive newapproach.
"My guess is, the markets will be disappointed," Loynes said.