The Federal Reserve, which meets next week, will be watching Thursday’s European Central Bank meeting just as closely as financial markets as it mulls whether or not to deliver a monetary boost to a fragile U.S. economy.
ECB President Mario Draghi bought calm to volatile markets in late July when he pledged to take action to end a debt crisis in the euro zone. Now, with a long-summer break over, it is crunch time for the central bank to deliver and outline just how it plans to alleviate pressure on troubled euro zone member states that are struggling with high borrowing costs.
What the ECB (learn more) says on Thursday is important to the Fed because any disappointing news could trigger a fresh bout of market volatility and uncertainty. That in turn could persuade the Fed (learn more) to deliver monetary easing via quantitative easing (learn more) at its Sept. 12-13 meeting, especially if any bad news from Europe is followed by weak U.S. jobs data, says Jim Awad, managing director at Zephyr Management in New York.
U.S. jobs numbers are released on Friday and economists expect to see a rise of about 120,000 in August nonfarm payrolls.
“The case for waiting (on monetary stimulus) for the Fed, is that the U.S. economy is still growing and markets still believe that in the short-term, Europe will get its act together and buy bonds,” Awad told CNBC Asia’s “Squawk Box” on Wednesday, referring to expectations that the ECB will unveil plans to buy the bonds of troubled euro zone members.
“So, if we get nonfarm payrolls at 125,000 or more, (Federal Reserve Chairman Ben) Bernanke is likely to wait and save room for an emergency. But if Thursday in Europe is disappointing and the payrolls come in below 125,000, I think Bernanke will go next week,” he added.
The Federal Reserve has kept interest rates near zero since 2008. It has also conducted two rounds of quantitative easing to lower long-term borrowing costs and promote investment and growth. It is a third round of quantitative easing that investors are now anticipating.
Weak economic data on Tuesday appeared to support the case of further monetary stimulus, with a survey from the Institute of Supply Management showing U.S. manufacturing contracted at its sharpest rate in more than three years in August.
In Europe, meanwhile, caution in the run-up to the ECB meeting has taken the edge off a rally in equity markets, which closed loweron Tuesday.
Some analysts say decisive action from the ECB this week would ease pressure on the Fed to act to stimulate growth, especially since the U.S. central bank may prefer to wait until after the November U.S. presidential election is over before releasing any further monetary stimulus.
“We are entering into a strange couple of months because the ability of the Fed to take up much of the slack seems to be quite limited on the basis that they will be quite reluctant to make any major moves ahead of the election, on fear of appearing too partisan,” Stephen Davies, CEO at Javelin Wealth Management told “Squawk Box.”
“So the emphasis will be on the ECB again to try and suppress yields on some of the peripheral euro zone countries, which may mean a reactivation of the bond-buying program,” Davies said. “But the stories we have coming out of northern Europe in terms of ongoing opposition to those programs is quite strong, so that leads to further uncertainty and uncertainty is never very good for financial markets,” he added. German officials in particular have in recent weeks raised opposition to the possible buying of government bonds by the ECB.
—By CNBC’s Dhara Ranasinghe