Heat rises on Central banks to fix global economic problems

July 31, 2012 – ECONOMY – The U.S. Federal Reserve and European Central Bank face critical tests this week amid heightened expectations that they are moving toward new actions to tackle fragility in the global economy. Markets have risen on hopes that two of the world’s most influential central banks will make additional moves to spur growth if their economies don’t perk up—if not this week, then in the weeks ahead. The Dow Jones Industrial Average posted three days of gains late last week, and finished largely flat Monday, down 2.65 points, to 13073.01. But doubts linger in financial markets, and even within the central banks themselves, about whether the guardians of U.S. and European money and interest rates have the capacity—or tools—to fix the problems facing their respective economies. Growth in the U.S. economy slowed further in the second quarter, to an annualized 1.5% rate, according to figures released Friday. Europe’s pace of economic contraction increased in July. The slowdowns raised fears that businesses and consumers would pull back further. The two-day Federal Open Market Committee meeting convenes Tuesday, following signs that Fed officials have become more willing to act to address disappointingly slow U.S. economic growth. The ECB meets Thursday, a week after its head, Mario Draghi, lifted expectations when he said the central bank would do “whatever it takes” to preserve the euro, within its mandate to keep inflation low. Anticipation of such moves has spurred markets in the past, but they have deflated again afterward amid renewed sentiment that the fundamental problems in U.S. and European economies remain too deep-seated for central banks to fix. Fueling investor skepticism now is the sentiment that the central banks are moving largely alone: Leaders of both central banks, warning that monetary policy has its limits, are pressing elected politicians to do more to reduce uncertainty and bolster growth. “Central bankers are very conditioned to be confident in the power of monetary policy,” says Benjamin Pace, chief U.S. investment officer for Deutsche Bank Private Wealth Management, which manages $350 billion. “But the markets are questioning how many arrows they have left in their quiver.” –WSJ