Ahead of the meeting of the Federal Open Market Committee this week, financial markets were said to be engaging in pre-meeting swoon, said The Financial Times in its report. Some of the analysts have charged the drop in both credit and stock markets to the positive economic data released recently and that the fact that the budget deal progress suggested that the fiscal policy will be less of the drag in 2014 as compared to this year. Speculators relied on the belief that every bullish sign on the macro front will accelerate the day when the US Federal Reserve decides to reduce its monthly bond purchases, an in effect reducing the liquidity provision to the markets, the report stated.
On the other hand, the report said cynics are tempted to believe that the swoon was meant to ensure that the Fed will not taper its bond purchases down, ensuring liquidity flow to the markets in the process. The report pointed out that in May and June, Fed chairman Ben Bernanke said the gradual end of the quantitative easing could cause markets to drop, hence its need to continue with its fiscal policy.
Henny Sender said in an article in The Financial Times, "These days the Fed wants to have it all. Its zero interest rate policy is meant to encourage risk taking, compelling savers and retirees to move away from safer investments if they are to earn even minimal returns. At the same time, though, the Fed does not want to be blamed if (or more likely when) it all goes wrong."
Despite little evidence of the threat to the financial markets should the Fed decide to taper its quantitative easing, the Fed, together with the Office of the Comptroller of the Currency, had urged banks to take a closer look to any deals the banks would finance when the leverage is six times more than the value to avoid another financial catastrophe.
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