Economy Watch: No Clarity From Fed on QE3

The Federal Reserve Open Market Committee recently released the minutes of its latest meeting, and in its usual opaque way, didn't convey to investors' satisfaction many hints of whether the central bank was ready to prime the pump of the economy again.

The Federal Reserve Open Market Committee released the minutes of its latest meeting (June 19-20) on Wednesday, and in its usual opaque way, didn’t convey to investors’ satisfaction many hints of whether the central bank was ready to prime the pump of the economy again (QE3, in other words). Maybe, the central bankers said, some stimulus would be in order (they didn’t use that word) if things got really, really bad (to paraphrase them).

Some choice central bank speak: “Strains in global financial markets, which largely stemmed from the sovereign debt and banking situation in Europe… increased during the intermeeting period and continued to pose significant downside risks to economic activity both here and abroad, making the outlook quite uncertain. The possibility that U.S. fiscal policy would be more contractionary than anticipated was also cited as a downside risk.”

“Contractionary policy” is what most people are calling the “fiscal cliff”—the impasse over taxes and spending cuts that will come to a head early next year when the Bush-era tax cuts expire and the “automatic” cuts created by the debt ceiling deal last summer hit the economy at about the same time. If nothing is done in the interim, that is. The central bankers are probably right to be worried.

Exports up, imports down

Despite the fact that Europe and China both are facing their own economic problems, the U.S. managed to export more to those parts of the world during May than during April, the Census Bureau said on Wednesday. It was part of a contraction of the U.S. trade deficit from a revised $50.6 billion in April to $48.7 billion in May, as exports increased and imports decreased overall.

The April-to-May increase in U.S. exports reflected the fact that other countries were buying more foods, feeds and beverages ($0.9 billion worth) and capital goods ($0.7 billion). But foreigners weren’t buying quite as much U.S. industrial supplies and materials ($0.8 billion less); consumer goods (down $0.2 billion); and automotive vehicles, parts and engines (off $0.1 billion). Other kinds of goods were virtually unchanged month-over-month.

Of course, there’s still a whopping deficit with China, which in fact increased to $26 billion in May from $24.6 billion in April, according to the bureau. Still, the United States exports to the Middle Kingdom increased by $0.4 billion (mainly corn, semiconductors, and telecommunications equipment) to $8.9 billion, while imports increased $1.9 billion (primarily computers and accessories and telecommunications equipment) to $34.9 billion.

LIBOR investigations ramp up

It’s called the London Interbank Offered Rate, but these days it’s more of an international lightning rod rather than a benchmark, ever since British bank Barclays agreed to pay $453 million to settle charges by British and American authorities that the bank to doing its best to manipulate the rate not so many years ago. Such manipulation is no small thing; in fact, it touches the core of the world economy, since LIBOR underpins some $550 trillion (trillion with a T) in loans, securities and derivatives, give or take mere billions.

Barclays wasn’t alone, and thus various (British and non-British) entities are now investigating other banks as well. On this side of the Atlantic, the U.S. Commodity Futures Trading Commission has launched a major investigation, and there will be Congressional hearings soon. A handful of state attorneys general are considering their own investigations, and some parties who were (possibly) affected by the manipulation, such as municipalities whose borrowing costs rose, are talking about lawsuits against the banks involved.

Wall Street didn’t seem pleased about the Fed minutes on Wednesday, dropping as soon they were released. But in the end, the indices didn’t move much, with the Dow Jones Industrial Average off 48.59 points, or 0.38 percent, and the Nasdaq off 0.49 percent. The S&P 500 broke even.