No Clarity from Fed on QE3; U.S. Exports Rise

The Fed's Open Market Committee offered few hints about whether it was prepared to prime the pump; U.S. exports rose from April to May, according to the Census Bureau. Investigations over LIBOR manipulation pick up steam.

The Federal Reserve Open Market Committee released the minutes of its latest meeting (June 19-20) on Wednesday, and in its usual opaque way, offered investors few hints  of whether the central bank was ready to prime the pump of the economy again (translation: quantitative easing, part 3). Maybe, the central bankers suggested, some stimulus would be in order (though they didn’t use that word) if things got really, really bad (to paraphrase the Fed once more). 

Some telling comments: “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 

Even though 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 ($900 million worth) and capital goods ($700 million). But foreigners weren’t buying quite as much U.S. industrial supplies and materials ($800 million less); consumer goods (down $200 million); and automotive vehicles, parts, and engines (off $100 million). Other kinds of goods were virtually unchanged month-over-month. 

Of course, there’s still a whopping deficit with China, which increased to $26 billion in May from $24.6 billion in April, according to the bureau. Still, U.S. exports to China increased by $400 million (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 tried to manipulate the rate a few years ago. Any manipulation of LIBOR is no small thing; it touches the core of the world economy, since LIBOR underpins some $550 trillion in loans, securities and derivatives. 

Barclays apparently wasn’t alone, and thus various entities—British and non-British alike—are 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 probes of their own, 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.