(C) Fed’s Policy and The Capital Markets

The US sub-prime crisis exhibits deepening liquidity trap in the financial system. Consequently, any cheapening of the missing resource – cash is bound to divert funds back in the economy as a whole, and the capital markets in particular. On the other side, when a monetary policy decision is expected, the effects of the change are barely visible, while compared to the effects of an unexpected for the economy and the markets policy shift.

The Federal Reserve Board operates under two mandates – maintaining low inflation and stimulation the economy at the same time. The immediate consequences of the expected money supply growth would most probably lead to some short-term irrational, positive mood shift of the markets and the consumers. In the long run, however, any such change would foster the inflationary processes in the US.

In such circumstances we would better be interested in the potential of the monetary policy in stimulating the American consumers and businesses, rather than the short-term capital markets influence. Any inflated cash market stimulation would not yield substantial real growth of the economy and the markets, but nominal.