| Story Views | |
| Now: | |
| Last Hour: | |
| Last 24 Hours: | |
| Total: | |
Bernanke Only Deferring Day of Reckoning for Fed
By E.S. Browning
Wall Street Journal
Reassuring statements from the Federal Reserve have calmed financial-market anxieties. Stocks have recovered their June losses.
But the Fed may not have solved the problem; it may just have put it off.
If so, markets could turn volatile as autumn approaches and investors once again begin wringing their hands over the likely timing and consequences of a cutback in Fed stimulus.
Stock and bond prices fell in June because investors fear the day when the Fed starts cutting back on its $85 billion in monthly stimulus for financial markets. When Fed officials indicated that they could start trimming the stimulus in a matter of months, the selling began. The market slide ended after a succession of Fed officials made forceful statements that they won’t do anything until the economy is strong enough.
Lately, Fed Chairman Ben Bernanke has said they he himself doesn’t know when the Fed will begin to move: It will depend on the data.
In effect, he has pushed the problem into the future. Investors, somewhat mollified, have decided to worry about it later. They have begun buying again, riding a market that seemingly refuses to decline and sending the Dow Jones Industrial Average and other major stock indexes to record highs.
Now, no one knows when the Fed will start reducing monthly stimulus spending. Many investors still expect it in September. But a significant number think the economy is too weak. They think the Fed will wait until December or maybe even next year.
If the Fed acts in September, those investors will be disappointed, perhaps even anxious. The stock and bond selling that the Fed worked so hard to stem over the past few weeks could resume.
“If the Fed acts, I think it could weigh on the market,” says investment strategist Gary Thayer at Wells Fargo Advisors, the brokerage division of Wells Fargo & Co.
Although the Fed’s jawboning has put the selling on pause, it hasn’t erased the fear many investors still feel about what will happen when the Fed stimulus begins to wane.
The most obvious reason for concern is that stock-market performance has tracked the coming and going of stimulus programs since the stock market began its rebound in 2009. Periods of market gains overlap closely with times when the Fed was pumping money into financial markets or was poised to do so. Market slumps coincide with periods when the Fed was lightening up on stimulus.
During that time, economic growth has been subpar but stock and bond gains have been unusually strong. This year alone, following the Fed’s decision to launch a third round of bond-buying stimulus last year, the Dow industrials are up 18%.
The stimulus program was intended in part to help compensate for the exceptional weakness of financial markets following the 2008 financial crisis, and it seems to have done that. Little wonder that investors turn fearful whenever they face the prospect that the stimulus could be withdrawn.
That isn’t the only reason for concern. Michael Hanson, senior economist at Bank of America Merrill Lynch, estimates that the U.S. economy grew at a 0.9% rate in the second quarter, making it the third consecutive quarter of soft growth. Retail sales, industrial production and other economic indicators have been weak.
Others add that developed economies in Europe and developing economies around the world are going through difficult patches. And the U.S. Congress once again is threatening to cut back on U.S. government spending, making this a risky time for the Fed to stop stimulating.
Like Mr. Thayer, Mr. Hanson thinks the soft economy will persuade the Fed to put off any action until later.
But, he adds, “Let’s be honest. The next several months if not years are going to be much more volatile than the previous ones. There is still scope for the markets and the Fed not to be on the same page.”
On top of that, September historically has been the weakest month for stock performance. In years like the current one, when stocks already have put in exceptional gains, it can be a time for investors to look to the coming year and question whether the gains can continue. If they have doubts, they may sell.
Many analysts downplay this kind of concern. They think markets have adjusted to the prospect of a gradual withdrawal of Fed stimulus, and will react calmly as long as the Fed doesn’t seem to be hurting the economy or corporate profits. They note that the Fed has said it will stay flexible and could actually increase its stimulus if the economy worsens.
But the current bull market has been going on now for more than four years, making it one of the longest of the post-war period. Investors increasingly are beginning to wonder what will keep it going.
The post Bernanke Only Deferring Day of Reckoning for Fed appeared first on Midas Letter.
Source: http://www.midasletter.com/2013/07/bernanke-deferring-day-of-reckoning-for-fed/
