The Federal Reserve is more likely to provide additional stimulus than the European Central Bank after ECB President Mario Draghi put pressure on political leaders to address the region’s debt crisis, according Axel Merk, founder and president of Merk Investments LLC.
ECB policy makers discussed cutting interest rates to a record low today after leaving their target rate at 1 percent, fueling expectations they will act as soon as next month as the worsening debt crisis curbs economic growth. While the ECB extended into next year its policy of lending banks as much money as they want for periods of up to three months, Draghi indicated another round of three-year loans is not imminent.
Draghi’s “not going to print much more money, so all eyes are on another round of quantitative easing, and that is why the market is moving,” Merk, of the Palo Alto, California-based firm, said in a Bloomberg television interview on “Surveillance Midday” with Tom Keene. “Today’s rally isn’t a Draghi rally, it’s a Bernanke rally,” he said, referring to Fed Chairman Ben S. Bernanke.
Bernanke said in April the Fed may ease further should unemployment fail to make “sufficient progress towards its longer-run normal level.” Since then, the unemployment rate rose to 8.2 percent in May after the economy added the fewest jobs in a year. A measure of manufacturing in the U.S. grew at a slower pace last month, a report showed today, before the policy-setting Federal Open Market Committee meets June 19-20 to consider whether more economic stimulus is needed.
“There is capacity to do more,” Fed Bank of Atlanta President Dennis Lockhart said today in a speech in Fort Lauderdale, Florida.
The dollar fell against all of its most-traded counterparts excluding the yen today as investors bet Bernanke would signal a third round of stimulus. The excess liquidity from asset purchases may debase the U.S. currency while boosting higher- yielding assets.
Draghi sees Europe as having adequate liquidity and is putting pressure on Spanish Prime Minister Mariano Rajoy and German Chancellor Angela Merkel to figure out a political solution to Europe’s debt crisis, Merk said. This sort of incentive doesn’t exist in the U.S., where the financial system is “patching up” problems instead of engaging in fiscal reform, he said.
Cooperation across national banks will be key to fixing Europe’s debt crisis, according to Merk. The Group of Seven nations yesterday agreed to coordinate their response to Europe’s turmoil, which has tipped at least eight of the 17 euro-area economies into recession and is threatening the global economy.
“What differentiates Draghi from his predecessor, and other central banks, is he makes it very clear that he’s going to support the banking system, not the sovereigns,” Merk said, referring to previous ECB President Jean-Claude Trichet. “If we get this banking union, we’re finally going to be able to allow sovereign defaults without crippling the banks.”
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