Yesterday’s post about the euro ended with brief speculation about the U.S. Federal Reserve’s possible involvement in supporting Europe. And then this morning early, the Fed joined other major central banks in a coordinated move that will add liquidity to global markets.
I was immediately cynical about the move, and remain so. The central banks’ efforts seem nothing more than a short term palliative and no guarantor of coordinated political action ahead.
But the markets went wild: the Dow was up more than 4%.
I was curious to sit down tonight and see what various economists had to say about it.
The decision by the Federal Reserve to reduce the interest rate and extend the duration for its dollar swap facility with the European Central Bank is at best a temporarily ameliorative measure that does not come close to addressing the fundamentals of the euro zone crisis.
Today’s action by the Fed was the best it can do to protect the U.S. short of doing Europe’s central banks’ job and purchasing foreign government debt itself, something that isn’t going to happen. This should give Europeans and the E.C.B. more time to act, but in the end the underlying problems must be addressed before the crisis will end.
So this looks to me like a non-event. Yet markets went wild. Are they taking this as a signal that substantive actions — like the ECB finally doing what has to be done — are just around the corner? Are they misunderstanding the policy? Was this cheap talk that nonetheless moved us to the good equilibrium? (If so, not enough: Italian bonds still at more than 7 percent).
The increased liquidity, the market surge, the confidence, and the optimism borne of the central banks’ coordination will likely be enough to keep the Eurozone intact for a couple more weeks, but today’s move could easily be another example of kicking the can down the road.