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The Dow Jones has made another triple-digit move today, climbing 137 points or 0.9% by early afternoon in New York, as the Federal Open Market Committee (FOMC) begins its two-day meeting to determine monetary policy. With such a strong rally it would appear as if the disquiet surrounding the possible early tapering of the Fed’s stimulus package has played itself out.
Of course, this may just be the calm before the storm if the market doesn’t get what it wants, namely some kind of placating comments from the Fed, with commitments to monetary policy being kept accommodative over the long-term. With the initial toys-thrown-out-of-the-pram stage at the prospect of an end to easy money, though, investors are going to have to reconcile themselves to the inevitability that tapering will eventually occur, the only questions remaining on timing.
Today’s CPI data, which showed US prices climbing just 0.1% in May, shows that inflation is not any kind of a concern at the moment, remaining well anchored, to use a term that Ben Bernanke often bandies around, and this gives some latitude to the Fed in holding off from tapering, should they so choose. A decision to reduce the monthly asset purchases at this meeting would be a genuine surprise, and my own expectations are for some clarity on the issue from this meeting with the actual reduction coming later in the year.
Today’s housing starts once again highlights one of the current strengths of the economy. Construction was begun on 914,000 residential properties in May, up from an upwardly-revised 856,000 in April, but apart from the growth here and in the auto industry, things are looking sub-optimal and I would think that the Fed has concerns about the slow improvement in the unemployment rate and below-target inflation.