“The Fed is Optimistic While the Markets Dither”


 
July 10, 2013
 
After a great deal of speculation at the beginning of June regarding when the Federal Reserve might let up on its quantitative easing policy, Federal Reserve Chairman Bernanke finally spoke….and the markets overreacted with both stocks and bonds taking a hit in the face of indiscriminate selling.
 
Chairman Bernanke carefully couched his announcement on June 19, stating that the pull-back is predicted to begin later on this year, and that the Fed will reduce monthly purchases of Treasury securities and mortgage-backed bonds gradually beginning later in 2013 and finishing once the unemployment rate reaches Seven percent (which the Fed projects to be around mid-2014 ). He stressed the fact that the timing of the pull-back will be contingent upon the economy, understanding that if development falters, the central bank would probably slow or even reverse its retreat.
 
Even with a host of provisos and disclaimers, traders responded like Bernanke had pulled the rug out from under them. Keep in mind that all this reaction was to a speech; the Fed has not created any modifications or established any plan to do so. The market’s dive demonstrates the capability that the Federal Reserve exerts over the mindsets of investors, traders and economists.
 
When they established the central reserve system A hundred years ago in 1913, the lawmakers that set it up could have hardly imagined the capability the Fed yields today. Up until the Fed’s latest policy meeting, the stock market had been performing very well. The Dow Jones Industrial Average was up 20 percent since the beginning of the year, and had established a new record high. Bernanke’s comments, which came after a two day policy conference in Washington, evidently rattled Wall Street gurus that favored that any QE let-up be pushed back into a more nebulous time frame.
 
A review of what Chairman Bernanke really said throughout the press conference should reassure the most anxious investor that the Fed intends to proceed very cautiously in order not to disturb the economic progress that has recently been made. Unwinding the stimulus campaign slowly is anticipated to take several years. The Fed expects to carry on for the time being to buy $85 billion of bonds each month in Treasury securities and mortgage-backed bonds, as well as hold short-term interest rates to near zero.
 
Following a couple of jittery days, investors began to settle down. After taking a serious hammering in the wake of Bernanke’s comments, both the DJIA and the Standard & Poor’s 500 recovered near the end of June.
 
Job Creation
 
In another news release, the Fed declared that it is expecting unemployment rates to decrease quicker than they had expected – reaching between 6.5 percent and 6.8 percent by the end of 2014. The Federal Reserve has noted, in another statement, that the economy was expanding at a moderate pace and that risks to growth had diminished – an important observation because the Fed had been trying to protect the economy from the effects of government spending cut-backs.
 
With better news on the housing front and polls showing consumer confidence growing, investors have a lot to celebrate. As the knee jerk reactions over Bernanke’s speech subside, perhaps we shall cruise into smoother waters in July.