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Market participants were disappointed that the Fed decided not to start the ball rolling, and those looking for the conditions required to kick-start the process were equally disappointed as the Fed have stayed away from these criteria, citing financial conditions as reasons not to taper. In June, Ben Bernanke laid out a roadmap with unemployment at 7% as the criterion to mark when the Fed would start tapering.
The view from the Fed
Today, he said that 7.3% is “well above acceptable levels” and “tightening of the financial conditions if sustained” is a risk to the labour market and economic growth. During the Q&A session, Bernanke stated that unemployment has to be “considerably below 6.5%” before raising benchmark interest rates.
The other interesting point was the Fed’s view that rate policy is stronger and more reliable than QE, which implies that QE has not trickled down into the labour market as they would have hoped. It is clear the labour market remains a concern, and the top line we all look at is not a true reflection of the situation.
The main take away from it this time appears to be the negative tone regarding a US economy not ready for tapering, as they revised down their forecast for GDP to 2-2.3% this year from 2.3-2.6% in their June forecast.
US stocks soared to uncharted territory. Yields on the benchmark 10-year note fell 16 basis points to 2.69%, gold bounced off the $1300 support to $1363 and the US dollar tanked. Emerging markets will be the main beneficiaries, given their sensitivity to the Fed policy, which has been fairly evident.
Asian central bankers can take a breather as investors will look to re-enter these markets, as the valuations in the US are looking stretched. We saw ETFs for emerging Asian markets rally overnight, with Indonesia taking the lead with a 9.5% gain, the Philippines at 7.2% and India at 5%.
We would expect momentum for both Asian currencies and equities to continue this morning.