Treat, counting on it

Markets: Halloween may be over, but high-flying markets are still hoping for treats this week. The Bank of England’s door is likely to slam shut. Last week’s growth was just too good. Many US Democrats may be thrown into the cold on Tuesday. Investors are counting on a treat from the US Federal Reserve. But the central bank’s game is dangerous - it needs the markets and cannot afford to disappoint them.

The Fed is expected to dish out the goodies in its statement on Wednesday. Before then, the excitement will be political, with the Democrats expected to lose control of the House of Representatives, and suffer losses in the Senate. Markets are unlikely to care. The Obama administration has already played its hand in the battle to exorcise the ghost of Depression past. Unless the economy gets worse, the government has little stomach for more fiscal stimulus.

That leaves the onus on Ben Bernanke, the monetary wizard at the Fed. He has already signalled his thoughts. His treat may be to print money by purchasing financial assets, perhaps in the order of $100 billion or so per month. Having promised this treat, the Fed can ill afford not to dispense it. Markets have partied since Bernanke suggested in late September that he would wave his wand again. Treasuries have gone still higher – and so have equities. Commodities have torn ahead as global markets embraced risk.

But the Fed needs the markets, too. Plunging equities and a still-worse housing market would drag the economy down. US consumer confidence depends partly on share values, which feed through into household wealth - currently down 17 per cent from its 2006 level.

The Fed can ill afford not to be generous. A trick would be too costly. Markets will continue to depend on central banks until the United States and the world economy pick up and money-printing treats are replaced by real economic growth.