Thursday, June 20, 2013

Markets melt as Bernanke suggests Fed money printing is almost over

The world's most powerful central banker has declared that the economic emergency in the United States is nearing an end.

The chairman of the US Federal Reserve, Ben Bernanke, has signalled that the unprecedented money-printing program, known as quantitative easing, might be wound down by the end of the year.

But the cautious optimism about the US sparked a heavy fall on Wall Street as investors fretted that an era of cheap and easy money might soon be over.

The Australian dollar dived to a two-year low as global investors moved their bets to a resurgent greenback.

The straight talk from Dr Bernanke is as significant as earlier mixed signals about the future of quantitative easing, which have in the past have sparked confusion and major sell-offs in global markets.

But today, his language was explicit.

Using a driving analogy, Dr Bernanke said the Fed's current bond purchases, valued at $US85 billion a month, might be about to go into reverse.

"If the incoming data support the view that the economy is able to sustain a reasonable cruising speed, we will ease the pressure on the accelerator by gradually reducing the pace of purchases," he said.

The comments are being interpreted as Dr Bernanke coming out of the economic closet after weeks of speculation that the Fed was about to taper its money printing.

Speaking after the Fed's two-day meeting, he even flagged some rough dates - a scaling back by the end of the year, and maybe an end by mid-2014.

AUDIO: Bernanke flags end to US stimulus program (The World Today)
These are qualified forecasts, and are coupled with the prediction that the US jobless rate will fall from the current 7.6 per cent to 6.5 per cent by next year.

So does that mean US interest rates are about to rise?

Using the driving analogy again, Ben Bernanke said although the Fed might be taking its foot off the accelerator, it wouldn't be slamming on the brakes any time soon.

"The economic conditions we have set out as proceeding any future rate increase are thresholds, not triggers," he said.

"For example, assuming that inflation is near our objective at that time as expected, a decline in the unemployment rate to 6.5 per cent would not lead automatically to an increase in the federal funds rate target but rather would indicate only that it was appropriate for the committee to consider whether the broader economic outlook justified such an increase."

Negative reaction

After almost five years of crisis since the collapse of Lehman Brothers, you might expect elation on Wall Street.

But instead of popping champagne, investors started selling as soon as the Fed's statement hit their screens.

The Dow Jones Industrial Average closed 1.3 per cent weaker in what some see as an overreaction to the prospect that the era of easy stimulus money is over.

Fund manager Cliff Noreen told Bloomberg that Dr Bernanke's intention to slow money printing should not have been a shock.

"I think what he said was very logical. A lot of market participants forget that we've had quantitative easing for four and a half years now," he said.

"Eventually this has to stop and they need to pull the throttle back on it."

The Australian share market followed the US lead and was down 2.4 per cent at 1:25 pm (AEST).

JP Morgan senior economist Ben Jarman says the Fed is moving cautiously with a clear timeline to ensure investors don't panic.

"He's been very clear this time around to make clear that if they do follow the plan and if they are tapering their QE and in effect and absolutely stopping that by mid-next year, then they'll only be doing that in a situation where the labour market is hitting its stride," he said.

Mr Jarman doubts the Australian dollar is in a permanent decline.

"It's going to go higher from here and that's really on the view that China, while there are risks around it, actually the talk around the downside is somewhat overdone," he said.

But that China insulation theory might not be has not been immediately validated.

Factory production shrank at a faster pace this month, adding to signs that growth is weakening in the world's second-biggest economy.

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