Bernanke Tries To Walk Back Market’s Expectation For QE3 On Day 2 Of Testimony, Stocks Give Up Gains Ways To Money

Jul 14

Bernanke Tries To Walk Back Market’s Expectation For QE3 On Day 2 Of Testimony, Stocks Give Up Gains

While in yesterday’s session, Bernanke’s testimony helped rally the US stock market, today, it had the opposite effect, as equities which had been higher, turned lower during and after his statements.

The main reason was his answer that the Fed does not think that current conditions warrant further stimulus – aka QE3.

From Marketwatch: “U.S. stocks shaved Thursday gains after Federal Reserve Chairman Ben Bernanke said the central bank was not ready to take immediate action to further bolster the economy.

The major indexes had tallied a strong advance after the government reported initial applications for jobless benefits slid to a three-month low last week and J.P. Morgan Chase & Co. reported increased banking fees boosted second-quarter net income above market expectations.

The major indexes came off their highs after Bernanke told Congress that the Fed wasn’t “at this point” prepared to take action to further bolster the economy.”

Here’s a look at a 15-minute chart of the S&P500 today:

We see the pair shedding all its gains from overnight and in the wake of the positive US jobless claims data.

Bernanke Lays Out Why Things Are Different This Time

Bernanke laid out the differences between the situation facing the country when the Fed decided to undertake QE2, mainly that there was threat of deflation, and the economy was losing jobs. This time there is inflation, and while job growth slowed to an anemic crawl in May and June, there is some guarded optimism that the economy will rebound on its own as transitory factors pass through.

Of course, a crisis brought about by politicians playing games with the US credit rating would likely undermine any confidence in the 3rd quarter.

From Bloomberg: ““We’re not prepared at this point to take further action,” Bernanke said today, in response to a question from Senate Banking Committee Chairman Tim Johnson, a Democrat from South Dakota. Johnson asked Bernanke why the Fed wasn’t immediately starting a new monetary stimulus program given the weak economic recovery and rising unemployment.

Bernanke said the current economic situation is “more complex” than it was last August when he signaled a second round of Treasury-bond purchases.

At time, the economy was in danger of stalling, he said, and the Fed was concerned that the country could be headed for a bout of deflation, a widespread and prolonged drop in prices, wages and the values of assets such as homes and stocks.”

The focus for the Fed is therefore underlying inflation. We have take a look at this chart of CPI here and see that we had been moving downward around QE2, now we have been on an upward path.

Here is a look at the annual CPI in both headline and core, and as we can see the recent trend is positive for both. Therefore, we would have to see inflation turn around, and fall back downward before we consider the Fed will opt for more easing.

Tomorrow, we get the CPI data for June, so we’ll have some more clues to the direction of inflation during the last month of the 2nd quarter.

What’s your take on what is needed for the Fed to consider raising rates?

Nick Nasad Chief Market Analyst FXTimes

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