| By :
Cedric Welsch
The US Fed seems to have officially acknowledged that economic recovery is not on a firm path and that economic conditions in the US are not as rosy as they had been expected to be. Given the Fed's acknowledgement of the issue, it has chosen to extend its soft monetary policy and has decided to reinvest maturing mortgage bond proceeds into government debt. As per the US Fed, economic recovery has been sluggish and growth in output is lower than anticipated. Consequently, the economy is not able to churn out new jobs and employment generation continues to be an issue. It may be noted that employment generation is key to US economic recovery as only more money at the hands of the consumers can lead to an increase in demand for goods and services and put the US economy on a positive growth path. Governmental attempts to invigorate the economy have led to a ballooning of the fiscal deficit and interest rates are near zero in any case. The fears of deflation are also leading to uneasiness in the US as a deflationary cycle can result in a negative growth spiral for the US economy. Fears of the slowdown in the US economy seem to have had a repercussion for commodities driven economies like Canada. With demand for commodities likely to remain soft, the Canadian dollar or the Looney took a beating along with some of the leading commodity stocks. The Looney also took a beating as Canada's June trade deficit widened suddenly. The fears of a weakening economy were not just limited to the US, but there seems to be signs that demand in China is also weakening. The Chinese economy is the fastest growing at this point of time and also a big consumer of commodities. Any slowdown in the Chinese economy will directly impact the demand for commodities and impact the growth prospects of commodity driven economies. The Looney in recent times had gained substantial strength and appeared to be emerging as an alternative investment avenue. However, a slowdown in global demand can result in a temporary move away from the Looney and can lead to the Canadian currency losing some of its sheen. The European zone, on the other hand, has given a more positive signal for economic growth and has suggested further monetary tightening. However, the Bank of England seems to be more in favor of continuing a liberal monetary policy due to weakening demand. The varying level of monetary policy stances taken by the US, Europe and England suggests that global economic recovery is in the throes of doubt once again. This suggests that the next wave of economic news is largely going to govern the thinking of the various central banks. If economic news emerging from China becomes more doubtful, an overall negative sentiment might set in and may force central bankers from further monetary tightening. Unfortunately, this could result in excess liquidity in the global economy, with stagnation in demand - a condition that makes economic policy making a tricky affair.
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