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Comments from various members of the Fed this week have helped to re-assure the market; even if they have not really been saying anything new, they have helped steers the focus of investors to the key point of tapering being tied to economic performance, which naturally remains uncertain.
President of the New York Fed William Dudley, a voting member of the FOMC, today delivered a speech in which he said expectations of an early rise in rates was ‘quite out of sync’ with the expectations of the FOMC.
Out of all the words in the official FOMC statement last week and Ben Bernanke’s ensuing press conference, the one item market participants had seized upon was the projection for scaling back later in the year.
The sell-off last week placed too much stock in this comment without properly trying to gauge how probable such a course of events would be. William Dudley’s speech today helped bring a dose of reality to the situation by emphasising the dependence of FOMC policy on economic data and pointing out how low inflation remains.
‘If labor market conditions and the economy's growth momentum were to be less favorable than in the FOMC's outlook — and this is what has happened in recent years — I would expect that the asset purchases would continue at a higher pace for longer,’ he said.
These comments came alongside several economic reports that suggest the economy is continuing to improve, albeit slowly. Jobless claims fell last week to 346,000, seasonally adjusted. That number was broadly in line with expectations and makes the four-week moving average look a little more respectable. Pending home sales climbed 6% in May, hitting a six-year high, which would appear to confirm that the housing market has been firing on all cylinders recently.
The stock market looks a completely different beast a week on from last week’s turmoil, with the S&P 500 enjoying its best three-day rally since January.