End of Fed easing?

20th June 2013

Ian Copelin, Investment Director, my wealth comments “Global equity markets have fallen sharply this morning after Ben Bernanke, the US Federal Reserve Chairman, signalled he would start phasing out its massive quantitative easing stimulus programme later this year.

Last night Ben Bernanke said that if the US (the world’s largest economy) performs in line with the Fed projections for economic growth, employment and inflation, the Fed will probably start to wind-down its $85 billion monthly bond buying programme later this year and end purchases around mid-2014.

Because Ben Bernanke’s highly unprecedented and highly accommodative monetary policy stance since the start of financial crisis has been so supportive of the recovery, the market fears any reversal.

It should be noted that this is not a reversal, it is merely a wind-down if the US economy continues to recover – it is essential to realise that Ben Bernanke will only do this if he thinks the US economy is in a self-sustaining recovery/growth phase, which is ultimately good for stocks as it implies corporate profitability growth.

In addition, I have been around long enough to remember that equities have tended to rise when the Fed begins reducing efforts to stimulate the economy. While I appreciate that this time is different as historically the Fed would start to increase interest rates to reduce economic stimulation (which is not going to happen anytime soon – this time it is simply about reducing and eventually stopping its $85 billion monthly bond buying programme), I believe that if the market sees proof that the US economy is capable of expanding on its own, I can see no reason why we won’t see equity market gains given that equity valuations are currently below historical averages.

The only uncertainty I can see is over the Fed’s leadership: Ben Bernanke’s second four-year term in office ends in January and recent comments Ben Bernanke and President Obama suggests that the administration plans to nominate a new Fed chairman.”