Monetary tightening is a long way off.

26th June 2013

Ian Copelin, Investment Director, my wealth comments “Equity markets have started to rebound after last week’s sharp falls following comments from Ben Bernanke, the US Federal Reserve Chairman, that he expects quantitative easing to end next year (please see my market update dated 20 June 2013).  The FTSE-100 was up 72.81 points (1.2%) yesterday and is currently up a further 53 points (0.87%) this morning at 6,154.9.

While there was an element of surprise by the aggressive timetable outlined by Ben Bernanke, it shouldn’t be seen as too negative, as the US economy is recovering – and Ben Bernanke’s statement increases the confidence in this recovery.

Interestingly, two regional Federal Reserve presidents (Richard Fisher, president of the Federal Reserve Bank of Dallas and Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis), have since both emphasised that monetary policy remains accommodative.  Richard Fisher went as far as saying “what we’re talking about here is dialling back…….the word ‘exit’ is not appropriate here”.

The US is currently nowhere near close to reaching the 2.5% inflation and 6.5% employment targets the Fed has set itself (currently 1.4% and 7.6% respectively), which suggests that Fed is unlikely to start winding-down its $85 billion monthly bond buying programme immediately, especially given that the full impact of the US fiscal tightening has yet to be felt – I think Ben Bernanke’s statement was to merely get the market ready for less monetary stimulus as it is hoped that, in time, there will be sufficient economic momentum for a normalisation in policy.

The major is risk is that we may go through a perverse period where strong economic data will be taken badly (as it brings forward the winding-down of the QE) while weak economic data will be taken positively by markets!  Either way, we are still a long way off from seeing Central Banks tighten monetary policy.”