FOMC communications leave investors uncertain about QE

TradingPub Admin | August 22, 2013

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The communications released by the Federal Open Market Committee over the last several months have generated substantial visibility, but the statements of these Fed officials - as well as the minutes that have been released for their meetings - have created substantial confusion surrounding the future of quantitative easing.

Inception of QE
QE began in the aftermath of the financial crisis, and has thus far involved several phases. As a result of this stimulus, the Fed has purchased more than $3 trillion worth of debt-based assets in an effort to jumpstart the economy.

These transactions have been cited as a major contributor to the sharp appreciation that several asset classes have enjoyed in recent years. However, various market experts have warned that QE has caused many securities to become inflated in value. As a result of this, there are concerns that the stock market could potentially drop sharply once these bond purchases are pulled.

June Fed announcement
One crucial development that had a major impact on the discussions related to the future of QE was the statements that Fed chairman Ben Bernanke made at the end of the June FOMC meeting.

When speaking with members of the media, Bernanke disclosed that the pace of bond purchases being made by the central bank could potentially be lowered in 2013. Also, he specified that in 2014, the Fed might stop these transactions altogether.

Markets responded sharply, and the Dow Jones Industrial Average plummeted 354 points in a single session on June 20, according to International Business Times. Stocks were not the only asset class that dropped in value, as gold plunged 7 percent during the day.

July testimony of Bernanke
Another key event involved Bernanke testifying before Congress in July, stating that the future of the Fed's asset purchases was not certain, and that these transactions could potentially be increased, The Associated Press reported.

The Fed chief noted that the strength of economic data was crucial, and that if it was weak enough, the existing bond purchases could be dialed up, according to the news source. Both bonds and stocks responded well to this announcement.

July FOMC minutes
A final event that was crucial in nature was the release of the minutes for the July meeting of the FOMC. This information was issued on August 21, and indicated that the Fed policymakers had not yet determined a time when the asset purchases of the central bank would be reduced, according to Bloomberg.

The minutes indicated that "Almost all committee members agreed that a change in the purchase program was not yet appropriate," the media outlet reported. This news helped to soothe global markets that had been roiled recently. Guidance on when the pace of QE will be reduced could potentially help to reduce speculative investments, which Fed officials have warned about due to the uncertainty surrounding when bond purchases will be lowered.

"They'll probably start to taper in September," Josh Feinman, the New York-based global chief economist for Deutsche Asset & Wealth Management, told the news source. "They know that that's widely anticipated, and they haven't done anything to deflect those expectations."

However, some economists have speculated that the FOMC could potentially push back the gradual reduction of these bond purchases to a later date, after the Fed issued a statement in July citing concerns that inflation is far too low and mortgage rates have been increasing, according to USA Today. These matters were brought up once again by Fed policymakers at their July meeting, as made evident by the minutes.

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