The movement witnessed in all asset classes on Wednesday more than adequately exemplifies the US Federal Reserve’s influence on financial markets. It was initially Ben Bernanke’s testimony before congress which started the first wave of action, particularly in the stock market, but also allowed gold to briefly breach 1,410 dollars per ounce. Each move was based on the Fed Chairman’s most recent explanation of their outlook for stimulus provided to the markets, and as interpretations changed the markets than changed in accordance.
The final tell for the markets though was not so much the testimony before congress, yet the minutes from the most recent Federal Open Mark Committee meeting released later in the day. For the first time since June of 2011 the policy setting committee reviewed the principles of an exit strategy for how they would slow their asset purchases or unwind their ballooned balance sheet. This effectively is what many have talked about for years as the point where the private sector takes over the economic recovery from the public. But as Bernanke hinted, simply allowing some of the mortgage debt they hold to mature would in itself act to shrink the quantity of assets the Fed holds, but evidently the time or rate in which they proceed is not the issue.
Some of the non-participating and more vocal District Fed Presidents’ have expressed their earnest concern with the long term consequences of this stimulus effort, and in turn the financial media has vocally promoted that the end or tapering of QEIII could really be in sight. But for that to be the case, it’s important to decipher the difference between QEI and QEII, and QEIII. The first two episodes of quantitative easing, although altered during their program were finite and predetermined. The point of this third round of extraordinary stimulus, and it is something Bernanke made clear during his congressional testimony, is that the data and the data only dictate the medicine prescribed.
It’s is foolish to try and pinpoint a date for when the Fed will abruptly halt or alter this stimulus effort because what should be realized by now is that it will be anything but surprising. Over the last few years, the central bank has made concerted efforts to make their actions and policy more open and transparent. In doing so, it’s allowed them to implement policy like asset purchases with investors knowing the intentions are to increase liquidity and certainty in financial markets. The Fed currently purchases 85 billion a month is treasuries and mortgage securities and they can increase or decrease that number depending on the data.
The impact, as many have forecasted will be on the shorter end of the yield curve as inflation expectations have begun to modestly increase. What that could imply for Canada is talks of an interest rate rise could come sooner than anticipated. The simple fact though is that the US dollar and strength it is expected to see in the short term will see most all markets worldwide on the defensive, but particularly the commodity based currencies.