Outside Economics

Fed and the Market

Posted by Wendell Brock, MBA, ChFC on Fri, Jun 21, 2013

This week Fed Chairman, Bernanke. made comments about tapering back the stimulus towards the end of the year. These comments have sent the market into a tailspin these past few days. What was once a background supporting role, has now become front and center, and the lead player on the markets Federal Reserve Seal logoworldwide stage. It is now the case if Bernanke sneezes the market gets a cold. The Fed’s tapering plans may be good to get out in the public because maybe the market can focus back on what is really important – the fundamentals of the company stocks that are traded daily rather than the Fed’s involvement. Understanding the tapering is important to the long term investment strategy. There are a few points that are important to know.

Bernanke said that tapering is contingent on continued improvement in the economy and the jobless rate. He described it as easing up on the throttle once the auto reaches cruising speed. This will not happen “until the outlook for the labor market has improved substantially.” The target jobless rate he wants is 6.5% vs. the current jobless rate of 7.6%. 

The next big discussion point was the interest rates – he expects to keep interest rates close to zero for a long time. Currently they are around 25 bps. Bernanke said, “The current level of the federal funds rate target is likely to remain appropriate for a considerable period after asset purchases are concluded.” This will keep borrowing cost very cheap for borrowers and will continue to squeeze bank margins as competition for new loans continues to heat up. The hope here is that companies will find reasons to borrow and expand their payroll. 

Additionally, the tapering plans will be postponed if the economy doesn’t improve as expected in 2014. The target date for the 6.5% unemployment is mid-2014. At the same time 14 of the 19 FOMC members don’t expect to raise interest rates until sometime in 2015 at the earliest. 

This leaves QE3 in place much longer than Wall Street believes making perhaps the fed a new permanent player. There may always be an economic hic-up that causes the Fed to stay involved in some way, keeping the markets artificially propped up. 

Yesterday’s major sell off caused havoc around the glob – making the Fed’s comments and policies the major player not just on Wall Street but in the world. It may be soon that the Fed Chairman becomes the most powerful man in the world instead of the President. After all, most people are more worried about their pocket book then who is president.  

While the market is the great predictor of what it expects to happen in three to six or nine months from now; the current mayhem seems to be an overreaction.  If the underlying economy is truly doing as well as reported from all the government agencies and the company quarterly reports, then things should continue for the next several months to a year moving forward. If the info is not strong and stable, well then, we will see another major move down. What are your thoughts about the economy?

Topics: Fed, Fed Chairman, Market, stimulus


Wendell W. Brock, MBA, ChFC

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