By Brooke C. Stoddard
June has seen some jerky financial actions and reactions. But the effect on the nation’s slowly-but-steadily strengthening economy may not be much. Federal Reserve Chairman Ben Bernanke notably held a news conference after the important Federal Reserve meeting of June 18-19 and said that the Fed would consider reducing its quantitative easing policies of recent years as it saw the economy improving. Because the quantitative easy policy of buying bonds and other securities has put cash into the economy while keeping interest rates low, traders, investors, and commentators took his remarks as reason to sell both bonds and stocks. The stock market in the days after Bernanke’s public remarks declined more than 4%.
Bernanke, charged with attempting to keep the economy growing slightly every year, to keep inflation in the neighborhood of 2%, and to pull whatever monetary levers he can to press unemployment down to somewhere around 6%, may have been dismayed at some of the reactions, but this has not been close to the first time that traders and investors have over-reacted to a Fed chairman’s words. Mostly, the securities sellers who caused the drops in value of the bond and stock markets were looking at the darker side of prospective Fed actions. Having noted the Fed’s quantitative easing policies of the last several years bracing the economy, fostering a slow but steady recovery, and keeping interest rates so low that the housing market has revived and businesses can borrow at reasonable rates, the sellers are fearful that cutting back on those stimulus policies will be a shock the economy is not ready to take. Believing the ready money has bolstered stock values and stimulated the housing market, they are selling their holdings before a general decline.
But the Wall Street Journal quotes traders as saying much of the selling has been the work of hedge fund managers who trade on short-term news.1 Such sellers have ignored the less blaring good news in the economy and in Bernanke’s remarks. Everyone knows the quantitative easing could not have gone on indefinitely and that it would be reduced in conjunction with a strengthening of the economy. If the Fed believes the economy is now gaining that strength, then this is the time to ease up on its stimulus policies. Moreover, higher interest rates will benefit the large portion of the population – retired persons – deriving income from interest-paying certificates; more money in their pockets will help the economy. Nor would the Fed hint at an easing of its stimulus policies if it did not see unemployment on a steady downward trend. In the last year unemployment has fallen from 8.2% to 7.6% and Bernanke sees a rate of 6.5% possibly by the end of 2014.
Pessimists also point to trouble in the Chinese economy, namely a slowing of its rate of growth and a potential credit crunch. They might also worry that such emerging economies as in Brazil and Turkey are also under threat. But the world’s preeminent economy, that of the United States, has been plodding ahead for years with little sign that a downward disruption lurks. Despite the S&P 500 sell-off that lowered value several percentage points, the index is up by 10%, close to its historical annual appreciation. Interest rates likely will creep back up and the rise in equities prices since the first of the year will slow, but probably the economy will plod along and the gyrations of June will become largely forgotten.
1Wall Street Journal June 15, page C1
Brooke C. Stoddard is an Alexandria, Virginia-based writer covering business, manufacturing, energy, and technology.Tagged with financial, tED