1. FED

1) Fed Shift to Long-Term Assets May Show Limits to Its Power

The Federal Reserve’s effort to reduce borrowing costs with an unconventional policy tool may also be highlighting limits to its power to fix what ails the U.S. economy.

Chairman Ben S. Bernanke and his policy-making colleagues yesterday cited “significant downside risks” to the outlook and responded with a program that economists say will provide at most a small boost to the recovery.

The Fed should instead put more pressure on fiscal authorities to revive growth and outline a clear policy strategy, including setting a target for inflation, said Greg Hess, a former Fed researcher.

Analyst Comment: The Fed needs to be answering questions, or providing confidence out there that answers questions, not just creating new ones. That’s why I think the response is negative and that’s why you’re seeing volatility rise.

2. Euro zone Crises

1) Constancio Says Sustained ECB Bond Buying Would Delay Fiscal Fix

European Central Bank Vice President Vitor Constancio said sustained bond purchases by the central bank would only delay the fiscal adjustments that euro- area governments need to make.

International Monetary Fund Managing Director Christine Lagarde said the ECB must continue to provide “solid, reliable” funding for euro-area banks and economies as parliaments in the region pass measures into law to fight the region’s debt crisis.

2) ECB May Cut Benchmark Rate by 50BPS at Oct. Meeting, RBS Says

The European Central Bank may cut its benchmark rate by 50 basis points in October, economists at Royal Bank of Scotland Group Plc wrote in an e-mailed note to clients.

A decision is unlikely to be unanimous, but given the “speed of financial market deterioration we believe that a majority will support a large cut,” said the economists who added that they “now forecast outright recession” for the euro area.

3) Italy Woes Likely to Outlast Berlusconi Government: Euro Credit

Prime Minister Silvio Berlusconi’s legal and political woes have fueled calls for him to quit and contributed to Italy’s first credit-rating downgrade in five years. His exit wouldn’t do anything to resolve the debt crisis.

A 54 billion-euro ($73 billion) austerity plan coupled with six weeks of European Central Bank purchases of Italian bonds have failed to lower the cost of financing Europe’s second- biggest debt.

Analyst Comment: I am sure the majority of the Italian population and indeed most financial market participants would like to see Berlusconi resign. The more pertinent issue is whether the current government can put forward credible structural reform plans and then get the requisite legislation passed.

4) Europe Mulls Increasing Rescue Fund Firepower as Stocks Slide

European finance chiefs said they may use leverage to increase the financial firepower of their regional bailout fund as a selloff in stocks signaled renewed concern that policy makers are failing to ward off a global economic slump.

The ratification process has drawn fire from some investors for being protracted and failing to provide the fund with enough cash to fulfill its new duties and prevent the turmoil from spreading to economies such as Spain and Italy. That has fanned speculation Europe may eventually expand the fund’s firepower by using leverage in a partnership with the European Central Bank that would leave the EFSF covering initial losses.

Analyst Comment: There has been a significant increase in the financial requirements of international intervention. You need a lot more firepower in order to be a circuit breaker.

5) Greece on Edge of Insolvency 24 Centuries After First Default

Greece is at the edge of the biggest sovereign default and policy makers are worried about global shock waves of a insolvency by a government with 353 billion euros ($483 billion) of debt -- five times the size of Argentina’s $95 billion default in 2001.

Potential consequences of a national bankruptcy include the failure of the country’s banking system, an even deeper economic contraction and government collapse.

Analyst Comment: There is a monstrously large amount of uncertainty and a massive range of possibilities. A macroeconomic disaster could be averted but only by aggressive policy action by central banks and governments.

6) China Can Help Europe, World Economy ‘At the Margin,’ Yi Says

China can support the European and global economies “at the margin,” though Europe must find the solution to its debt crisis itself, Chinese central bank Deputy Governor Yi Gang said.

Also this month, other Chinese officials indicated the country is prepared to offer assistance. Zhang Xiaoqiang, vice chairman of China’s top economic planning agency, said the nation is willing to buy euro bonds from countries involved in the sovereign debt crisis “within its capacity.”

3. Central Banks

1) Rate-Cut Bets at 7-Week Low on RBA Optimism: Australia Credit

Traders slashed bets on an interest-rate cut in Australia next month to the lowest level in seven weeks after the central bank showed optimism the nation will weather Europe’s debt crisis and a slowdown in the U.S.

Reserve Bank of Australia Deputy Governor Ric Battellino signaled Sept. 21 the economy should extend a two-decade expansion and that market pricing of rate cuts was “pessimistic.”

Australia’s economy grew 1.2 percent last quarter, the fastest pace in four years, while a 9 percent decline in the currency against the U.S. dollar since July 31 may aid struggling industries such as manufacturing and tourism.

Analyst Comment: The RBA would rather err on the hawkish than the dovish side as there are still pockets of strength in the economy, particularly if you look at the mining investment boom and growth in household disposable income. With the decline in the Aussie dollar, financial conditions are easing somewhat so that is another reason for them to delay any cuts.

2) South Korea’s Bahk Says Steps to Stem Won Swings Working ‘Well’

South Korean Finance Minister Bahk Jae Wan said measures to stem swings in the nation’s currency have been effective and the government isn’t immediately considering additional steps.

South Korea has stepped up measures to prop up its currency after turmoil sparked by the European debt crisis prompted foreign investors to flee the won. Volatility in capital inflows and outflows in addition to foreign-exchange rates poses the biggest risk to the economic outlook for South Korea, Bahk said.