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The Federal Reserve Open Market Committee met this week and held to the major tenets of its monetary policy. Rates will remain unchanged at near zero; Operation Twist will continue to extend purchases of longer-term Treasuries; language that rates will remain exceptionally low through mid-2013; and principal payments from its holdings of agency debt will be reinvested in agency mortgage-backed securities. The Committee anticipates “a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually.” The statement also said that the FOMC “anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate (inflation and employment) as the effects of past energy and other commodity price increases dissipate further.” 

Global equity markets popped yesterday, intensifying their October rally to 15% for the MSCI US Broad Market Index and 21% for the FTSE All World Index (ex-US). The enthusiasm was sparked by two events that equity investors broadly took as good news. European Union leaders agreed on a deal to theoretically end the two-year financial crisis with Greece at its center. And in the US, Gross Domestic Product grew in the third quarter 2.5%, more than was expected and following a 1.3% rate in the second quarter. But while conditions may be improving ever so slightly, the disease remains without serious work for cure.

Markets yo-yoed this week on news of Europe’s progress and lack of it in addressing their increasing debt concerns. Domestic economic news, both good and bad had little impact indicating that Europe’s problems may ours for months to come.

Psychologists have uncovered a fascinating phenomenon about people at the racetrack. The moment after placing their bet on a horse they become much more confident of their horse’s chances of winning than they were immediately before placing their bet. Is it possible that the very same thing happens the moment we invest in a stock or a mutual fund? 

How many times and in how many situations lately have we heard the familiar refrain we’ve never seen anything like this? Whether the subject is politics, housing, jobs, stocks, sovereign debt, corporate ethics, or American wars, experts find themselves unable to find comparison or remedy. Having no historical frame of reference makes us anxious. We naturally prefer familiarity over the unfamiliarity. We like trends and historical context on which to base our projections. We do not like unproven ideas. 

There was scant positive news this week offering hope to those still optimistic the US and global economies can avoid a recession. The government’s third and final revision of economic growth (GDP) for the second quarter was revised up to 1.3% from 1%, however still quite anemic. German lawmakers quelled short-term fears by approving an expansion of the euro-area rescue fund which allows European policy makers to focus on next to blunt their debt crisis. They will likely leverage the fund as the US did in its own crisis in 2008. 

Where there was considerable unity among world leaders at the outset of the Great Recession, the latest economic retreat is preceded by worsening splits and schisms. The scant fiscal and monetary responses so far lack not only coordination, but real long-term effectiveness. At home, our government is divided into three incalcitrant ‘parties’ each defying leadership and each seemingly oblivious to the costs of delay. Across the pond the European Union teeters on the brink of not only recession, but potential disintegration. 

It has been a week of dimming hopes. More economists now believe the US will slip into recession over the next twelve months. As the president stumped across to country to sell his jobs bill to the American people, Congressional support quickly waned on both sides. And indications that Greece will default on its sovereign debt combined with the worsening undercapitalization of European banks stymie efforts by Germany and France to hold the Euro region together.

Last night the president laid out a $447 billion jobs plan which includes continuing the holidays on some existing tax cuts as well as adding some new employer-side cuts. More than half of the plan is focused on tax cuts while another $105 billion goes to infrastructure renovations including school modernization, transportation projects and rehabilitation of vacant properties. 

If you have any exposure at all to the US economy, whether you run a corporation or you are raising money for the school PTA, you have no doubt noticed a certain reservation among people to spend, invest, or give their money. August proved a tough month for the economy. Confidence crushers such as the debt ceiling debate, the unprecedented downgrade of US Treasuries from AAA to AA+ by Standard & Poor’s, a plunging stock market, an earthquake strong enough to suggest attack for many in DC and NY, and an east coast hurricane that literally quieted the “city that never sleeps” all fueled a growing sense of pessimism.