Bernanke Talks – the Markets Fall – So What Else is New?

The recent testimony of Bernanke in Congress didn’t reveal anything new: He continued to say that the Fed’s current asset purchase program is important for keeping the U.S economy on its road to recovery. At the same time, he didn’t rule out the option of the Fed tapering the QE3 program in the next several meetings.

“At its most recent meeting, the Committee made clear that it is prepared to increase or reduce the pace of its asset purchases… in considering whether a recalibration of the pace of its purchases is warranted, the Committee will continue to assess the degree of progress made toward its objectives in light of incoming information.”

Bernanke still believes the current asset purchase program and the low interest rate are still helping the economy:

“In the current economic environment, monetary policy is providing significant benefits. “

But I think that the current QE program might have a diminishing effect on the U.S economy compared with the two previous QE programs.

He also stated, as he did in the past, that the progress of the U.S economy mainly in the labor market will determine the next steps the Fed will take. If the U.S labor market will show signs of improvement, the FOMC might consider winding down the asset purchase program.

According to the latest non-farm payroll report, the rate of unemployment is still high at 7.5%, which is higher than the 6.5% target the Fed set back when it had introduced the QE3 program. Moreover, the inflation is still stable at less than 2% so that the Fed isn’t pressed to cut the asset purchase program in the coming weeks.

The minutes of the recent FOMC meeting also came out today. It also showed that most of the FOMC still think that the current asset purchase program will continue until the labor market will show signs of improvement.

“Participants also touched on the conditions under which it might be appropriate to change the pace of asset purchases. Most observed that the outlook for the labor market had shown progress since the program was started in September, but many of these participants indicated that continued progress, more confidence in the outlook, or diminished downside risks would be required before slowing the pace of purchases would become appropriate.”

The minutes also showed that according to a dealers’ survey the median think the QE program will continue through December 2013. But at the same time several FOMC members stated that:

“A few members expressed concerns that investor expectations of the cumulative size of the asset purchase program appeared to have increased somewhat since it was launched last September despite a notable decline in the unemployment rate and other improvements in the labor market since then.”

This could suggest that the more FOMC members might think of reducing the QE program in the coming months (before December 2013). 

In any case, the news of a potential tapering in the QE program was enough to drag down the markets including equities, energy commodities, and precious metals.

In other news, the U.S existing home sales went up by 0.6% in April to reach 4.97 million compared with 4.94 million in March. In Canada, retail sales remained unchanged in March.

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