Mendoza School of Business

Central banks take center stage

Published: July 31, 2012 / Author: Ben Rooney

As central bankers in Europe and the United States gather this week, investors around the world are wondering what the monetary authorities will do to support the global economy.

First up is the Federal Reserve, which kicked off a two-day meeting Tuesday. The European Central Bank’s governing council will hold its monthly policy discussion Thursday.

Fed officials are meeting as the U.S. economy appears to have taken a turn for the worse, with a slowdown in job growth taking a toll on consumer spending.

While few expect the Fed to act this week, the central bank could extend its plan to keep interest rates near zero beyond its current 2014 forecast.

The Fed could also raise the rate on bank reserves in an effort to keep inflation in check by enticing banks to store more of their excess funds at the Fed instead of lending it out.

But analysts say the Fed will probably delay a decision on more aggressive moves, such as a third round of asset purchases, or QE3.

“I don’t expect any major change in policy,” said Jeffrey Bergstrand, a former Fed economist who is now a finance professor at the University of Notre Dame. “The Fed is wary of doing anything unless it sees a more substantive downturn.”

Depending on how the economy fares, Fed chairman Ben Bernanke could hint at further stimulus measures at the central bank’s annual symposium in Jackson Hole, Wyo., in late August. But experts say the Fed will probably not act until its September meeting, when it has had more time to assess the economy.


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