Bernanke optimism fails to quell market anxiety
Markets have been sold off before and quickly recovered as they digested Dr Bernanke's words. But the steep decline this time around underscored widespread fears.
One is that the economy is not strong enough to do without the Fed's support.
Another is that the Fed's decision to ease off the gas could, in itself, cause enough turmoil in the markets that economic growth could be threatened.
"There is a tremendous amount of doubt whether without Bernanke's help, the economy can keep chugging along," said Thomas di Galoma, head of bond trading at ED&F Man Capital Markets.
The breadth of the anxiety was evident across bond markets. Investors did not just sell the longer-dated government bonds that the Fed has been buying; they also sold shorter maturities, pointing to predictions that interest rates are likely to rise. The interest rate on the benchmark 10-year Treasury note climbed to 2.36 per cent from 2.19 per cent, the sharpest increase this month.
Strategists said investors were panicking and overlooking the nuances of Dr Bernanke's words. He emphasised the Fed was not likely to pull back on the stimulus until it was clear the economy could handle it and could step right back in if there were signs of faltering.
"Nobody is listening," said Gennadiy Goldberg, a rates strategist at TD Securities. "As soon as you give the market anything to chew on, they are going to tear the limb off."
Dr Bernanke said it would ultimately be healthy for interest rates to rise from the unnaturally low levels of the past few years. "If interest rates go up for the right reasons - that is, both optimism about the economy and an accurate assessment of monetary policy - that's a good thing."
Frequently Asked Questions about this Article…
Investors sold stocks and bonds after Bernanke spoke about improvements that could allow the Federal Reserve to step back from monetary stimulus. The comments sparked doubt about whether the economy can thrive without Fed support and triggered a wider market sell-off.
The article says two main fears emerged: that the economy may not be strong enough to do without Fed support, and that the Fed easing off stimulus could itself cause market turmoil that threatens economic growth.
Investors sold both longer-dated government bonds and shorter maturities, which pushed yields higher. Selling bonds generally raises interest rates because prices fall and yields move up.
The interest rate on the benchmark 10-year Treasury note climbed to 2.36 per cent from 2.19 per cent, representing the sharpest increase that month.
Many strategists in the article said investors were panicking and overlooking the nuances of Bernanke's words. They argued the market overreacted despite Bernanke stressing the Fed would be cautious about withdrawing stimulus.
Bernanke emphasised the Fed was unlikely to pull back on stimulus until it was clear the economy could handle it, and that the central bank could step right back in if there were signs of faltering.
Yes. The article notes one worry is that the Fed easing off the gas could, by causing market turmoil, threaten economic growth—even if the intention is to normalise policy.
The article suggests markets can overreact to Fed commentary: investors may panic and miss the nuance that the Fed intends to be cautious. It highlights that talk of higher rates can be healthy if it stems from genuine economic improvement.
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