Put your money there, Dr Bernanke
The Fed upgraded its forecasts for US economic growth three weeks ago, and said that if the world's biggest economy performed as expected, its $US85 billion-a-month quantitative easing program could begin retreating later this year.
Increases in short-term rates would come a "considerable" time after, Bernanke said, but it all hinged on the world's largest economy being able to withstand tighter monetary conditions.
The revelation, if you can call it that, was the conditional timetable for the withdrawal of QE, and given that it had been creeping in from the horizon all year it shouldn't have been a shocker. Confirmation that it would be gradual, contingent on the Fed's elevated economic predictions being met and separate from a more distant rise in interest rates, if anything, confirmed that the so-called Bernanke Put - monetary policy that by historical standards is looser than an elephant wrangler's lariat - was being sized up for a trim, not measured for the grave.
But investors headed for the hills after the Fed's June 19 announcement. Share prices sank, bonds spiked upwards - and as they did a conga line of US central banking boffins emerged to insist that the Bernanke Put was not dead.
The communications blitz that culminated on Thursday with the release of minutes from the Fed's June monetary policy meeting and separate comments by Bernanke appears to have finally succeeded. Share prices rose worldwide on Thursday, bond yields fell, metal prices jumped, the US dollar fell and competing currencies, including the Australian dollar, rose. Here's what we now know that we know.
At the June meeting, officials were in general agreement that the Fed needed to confirm "relatively soon" that the time to begin backing out quantitative easing was approaching. Most of them thought Bernanke should use his post-meeting press conference to do so. Bernanke did.
Most of the officials thought he should make clear at the June press conference that the QE withdrawal timetable and any decision on interest rates "would continue to be dependent on the committee's ongoing assessment of the economic outlook", and Bernanke did that at his press conference, too. The Fed predicts US economic growth of between 2.3 per cent and 2.6 per cent this year and between 3 per cent and 3.5 per cent next year, by the way, and the median predictions by economists surveyed by the Bloomberg financial news and data service are growth of 1.9 per cent this year, and 2.6 per cent. If the economists are right and the Fed is wrong, the QE timetable is likely to be extended.
The latest minutes report about half the Fed's 19-member monetary policy committee thought it likely QE could begin to be withdrawn late this year. Of the 12 members currently voting on policy under a rotation system, "several" believed the US jobs market was becoming strong enough for a QE retreat to begin soon, but "many" thought further improvement in the outlook for America's labour market was needed before the pace of QE could be slowed. Some members also wanted to see stronger general economic signs.
There was not much reaction when the minutes of the June meeting came out. But Bernanke addressed an economics conference in Massachusetts three hours after and in answer to a question said three things: US fiscal policy is still "quite restrictive"; the unchanged US unemployment number of 7.6 per cent in June probably "overstates the health of the labour market"; and "highly accommodative monetary policy for the foreseeable future is what's needed". That started the rally that spilled around the world on Wednesday.
Can the markets build again from here? Possibly. June-quarter corporate revenue and profit numbers in the US and June-half profit reports in this market in August are important for the sharemarket. A consensus that the Fed isn't going to crush growth in the world's largest economy by prematurely shutting down the Bernanke Put would create buying power capable of overwhelming day-to-day mood swings.
There was a taste of it here on Wednesday. Just before lunch, investors learnt unemployment rose more than expected in June, from 5.6 per cent to 5.7 per cent, the highest since September 2009.
A rising jobless rate signals economic weakness that is bad for share prices, but share investors ignored it and took the S&P/ASX 200 Index up 64 points. It also makes the Reserve Bank more likely to cut its cash rate, a prospect that normally drags the $A down. On Wednesday the currency dipped, bounced, eased a little and went into the evening about US92.5¢ - up from about US90.9¢ an hour after the Fed's minutes were released.
mmaiden@fairfaxmedia.com.au
Frequently Asked Questions about this Article…
The Fed signalled a conditional, gradual timetable to begin retreating from its US$85 billion-a-month quantitative easing program if the US economy performs as expected. Bernanke and Fed minutes stressed that any pullback would be gradual and dependent on ongoing economic data, not an immediate end to accommodative policy.
The ‘Bernanke Put’ refers to very loose monetary policy that supports markets. The article explains it’s not dead — policymakers appear to be sizing it up for a trim rather than removing it. In short, the Fed may ease QE over time, but that doesn’t mean it has abandoned market support altogether.
Markets rallied worldwide: share prices rose, bond yields fell (bond prices rose), metal prices jumped and the US dollar weakened while competing currencies like the Australian dollar rose. The market reaction reflected confidence that QE withdrawal would be gradual and conditional.
Bernanke said increases in short-term rates would come a “considerable” time after QE withdrawal and would depend on the economy’s ability to withstand tighter conditions. The Fed’s guidance indicates rate hikes are not imminent and will be contingent on future data.
The Fed projected US growth of 2.3–2.6% for this year and 3–3.5% for next year. By contrast, a Bloomberg survey of economists showed medians of about 1.9% this year and 2.6% next year. The article notes that if economists are right and the Fed is too optimistic, the QE timetable could be extended.
Rising unemployment signals economic weakness, which can weigh on share prices. The article notes Australian unemployment rose from 5.6% to 5.7% in June (the highest since September 2009), a development that can make the Reserve Bank more likely to cut its cash rate — a move that normally weakens the Australian dollar. Despite that, investors sometimes look past weak jobs data if they believe central banks will remain supportive.
The article highlights upcoming June-quarter corporate revenue and profit numbers in the US and June-half profit reports in Australia (in August) as key drivers. A consensus that the Fed won’t prematurely crush growth would likely create buying momentum capable of overcoming day-to-day market swings.
Currency moves were volatile: the Australian dollar dipped and bounced, but by evening it was about US92.5 cents — up from roughly US90.9 cents an hour after the Fed’s minutes were released. Overall, the US dollar weakened and competing currencies, including the AUD, strengthened during the rally.
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