Bernanke's optimism fails to quell 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…
Markets sold off because Bernanke talked about improvements in the US economy that could allow the Federal Reserve to step back from monetary stimulus. Investors worried the economy might not be strong enough without Fed support and feared that withdrawing stimulus could itself trigger market turmoil.
Bernanke said improvements in the economy could allow the Fed to ease off its stimulus, but he emphasised the central bank was unlikely to pull back until it was clear the economy could handle it and that the Fed could step right back in if there were signs of faltering.
Investors sold both longer-dated and shorter-dated bonds, signalling expectations that interest rates may rise. The yield on the benchmark 10-year Treasury note climbed to 2.36% from 2.19%, the sharpest increase that month.
A rising 10-year yield typically reflects market expectations of higher interest rates and can indicate anxiety about reduced Fed support. The article notes such moves were driven by predictions that rates are likely to rise and by broad investor unease.
Yes. Strategists quoted in the article said investors were panicking and overlooking the nuances of Bernanke's remarks. For example, Gennadiy Goldberg at TD Securities said 'Nobody is listening' and warned markets were tearing apart any hint to chew on.
The article describes that fear: some investors worry the economy isn't strong enough without the Fed and that easing off stimulus could cause enough market turmoil to threaten growth. Thomas di Galoma of ED&F Man Capital Markets highlighted widespread doubt about the economy's ability to 'keep chugging along' without Bernanke's help.
Bernanke said it would be healthy for interest rates to rise from the unnaturally low levels of recent years if the rise is driven by 'the right reasons' — namely optimism about the economy and an accurate assessment of monetary policy.
Commentators noted the anxiety was broad because investors sold both long- and short-maturity bonds, not just the securities the Fed has been buying. That broad selling reflected fears about rising interest rates and doubts over the economy’s independence from Fed support.
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