The financial markets will no doubt take careful note of today's meeting of the European Central Bank in determining how to position themselves going forward. The ECB meets every six weeks to discuss policy, and will make an announcement regarding today's gathering at 7:45 am EST tomorrow.
Next week, the Federal Reserve Open Market Committee (FOMC) will hold its October policy meeting on Tuesday and Wednesday. While traders on both sides of the Atlantic will be reading the Fed's tarot cards for clues to what the central bank is planning, neither the Fed nor the ECB is expected to make any drastic changes this month.
The ECB and Fed are, for better or worse, two of the big players in determining how the global economy reacts to and deals with its weak points. First, we'll look at the European side of the equation.
The central bank is probably mildly concerned about the euro's recent rally. The common currency has surged from just above $1.11 to now hover around $1.135 over the last month, an increase of roughly 2.25%. At one point in October, the euro even touched an 8-week high above $1.14 as the dollar softened up.
The ECB is likely to issue some nondescript statements above possible quantitative easing at the bank's December meeting without taking any action this month. Although most expect more stimulus to come at some point in an attempt to stoke growth in the Eurozone, the ECB would like to put some distance between itself and the Fed in terms of where interest rates are going. The more that the ECB can draw these contrasts (the Fed tightening policy while Europe plans more stimulus), the more downward pressure will be placed on the euro. Short of directly intervening in the currency markets, the ECB is hoping to weaken the euro in order to boost export demand.
In truth, most analysts don't expect ECB President Mario Draghi to expand the EU QE program until early 2016, or December at the earliest. You can find a run-down of the different expectations by major financial institutions here.
In the lead-up to the Federal Reserve's meeting next week (Tuesday the 27th and Wednesday the 28th), the members of the FOMC have been doing quite a bit of speaking lately. In doing so, they've generated, if nothing else, plenty of confusion.
A pair of Fed governors, Daniel Tarullo and Lael Brainard, expressed last week that the FOMC ought to hold off on raising rates due to the downside risks of a shaky global economy. At the same time, Fed Chair Janet Yellen, Vice Chair Stanley Fischer, and New York Fed President William Dudley have all (for many months) voiced the opposite opinion. This insistence that the Fed should increase the federal funds rate before the 2015 calendar year is out has been the preference of the FOMC's most influential members—yet there was an almost unanimous vote against such a move during September. Considering that the FOMC members almost uniformly vote in agreement with the chair, it would seem obvious that some misdirection is at play.
We'll have to wait until next Wednesday to hear exactly how the Fed justifies its decisions this time around, but don't expect a rate hike this month, no matter how often Janet Yellen claims that as her intention.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.