On the surface, The Federal Reserve Board and Facebook have nothing in common.
But media speculation about Fed action is very similar to the speculation that preceded Facebook’s IPO.
For a year or so before the IPO, it seemed that every business reporter was writing about when Facebook’s IPO would take place. While some of the better journalists talked to analysts who questioned the company’s valuation, there was also a great deal of hype about the impact Facebook’s IPO was going to have on the economy and on the environment for IPOs.
Goggle “Facebook IPO” and you’ll find 122,000,000 results!
Yet it would be an understatement to say that Facebook has failed to live up to expectations. The stock has been trading at well below its IPO offering price and, rather than give a boost to other IPOs, Facebook’s offering has discouraged other companies from going public.
More recently, media has been buzzing with speculation about another round of quantitative easing by The Fed.
It may not happen, although recent economic news of weakening economies in Europe, China and the U.S. may lead to Fed action. Minutes from the Federal Open Market Committee’s July meeting, which were just released on Wednesday, also suggest Fed “accommodation.”
As we noted in our previous blog entry, the U.S. stock market has been riding high of late, based on speculation about Fed action, although since then dismal economic news has been taking its toll.
However, as we said in our previous post, two rounds of quantitative easing have done little to help the economy and a third is likely to have the same result – especially since the market already jumped higher in anticipation of round three.
However, the other consequence of this speculation is that the dollar is weakening. If QE3 takes place, it would add to inflationary pressure and rising prices will make it even more difficult for consumers to make purchases.
So, like Facebook, The Fed action is likely to a big disappointment.
Global Weakening
While the market has been rallying in anticipation of Fed action, this week investors decided that bad economic news outweighed any positive influence from potential Fed action.
The Dow Jones Industrial Average (DJIA) fell for four straight days. Why? As The Wall Street Journal summarized, “In the U.S., new jobless figures disappointed. A report on manufacturing in China showed the biggest drop in nine months for the world’s second-largest economy. In Europe, a widely watched survey suggested that business activity across the continent continued a recent contraction in August.
Germany—Europe’s usual engine of growth—faced its biggest decline in new orders in three years, according to data provider Markit.”
Some will take heart, knowing that this weakening will increase pressure on The Fed to take action. Others will not.