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Share prices have struggled since Federal Reserve Chairman Ben Bernanke revealed in Wednesday’s press conference that the FOMC’s most likely projection is for a scaling back of its stimulus to begin later this year, while long-term interest rates have risen.
So far the market has focussed almost entirely on the prospect of a slowing of stimulus, while ignoring some of the other aspects of Mr Bernanke’s comments.
Although mentioning the specifics of a proposed timetable for a reduction in stimulus was a more hawkish suggestion than we have heard before, it was tempered by the intimation that the Fed might maintain ultra-low rates even after unemployment falls below the Fed’s 6.5% threshold. Mr Bernanke even went on to suggest that the threshold could even be lowered itself. He also said, 'We have no deterministic or fixed plan,' and stressed that the purchases are tied to the performance of the economy.
Interestingly James Bullard, the head of president of the St Louis Fed, issued a statement today saying that he felt the Fed’s decision to offer a time-frame for tapering was a misjudgement because inflation and growth still look soft. The statement suggested 'a more prudent approach would be to wait for more tangible signs that the economy was strengthening and that inflation was on a path to return toward target before making such an announcement.'
One thing this week has underlined is what a difficult juggling act the Fed has given itself in how to unwind its quantitative easing and how to clearly convey the plan to the market without creating damaging levels of volatility. At these levels, the S&P 500 is on track for a 2% loss this week.