Blog

Free trading education: Fed stimulus decisions create tradeoffs

TradingPub Admin | July 9, 2013

Responsive image

If you want some free trading education about how the decisions that Federal Reserve officials make about quantitative easing could create tradeoffs for the asset markets and the global investors who are involved, this could provide a helpful lesson.

Volatility could rise
Bloomberg reports that any reduction in existing bond purchases made by the Federal Reserve could amplify movements in the global asset markets. The central bank has already expanded its existing balance of assets to more than $3 trillion amid the stimulus, which has been criticized by some market participants as being too severe.

Recently, Ben Bernanke provoked substantial market volatility when he stated at the conclusion of the June Federal Open Market Committee meeting that the existing regimen of bond purchases could be reduced in 2013, and then eliminated altogether in 2014. Global investors responded to this news by pushing several asset classes, including equities and commodities, lower in value, during the week of the announcement.

In case this announcement was not enough for the global markets, Fed governor Jeremy Stein stated that these reductions in asset purchases could begin in September, according to the news source. He stated that the economic data that exists currently is enough to justify making such a move.

Economic growth concerns
While Stein may be particularly optimistic about the strength of the economy and whether or not stimulus is needed from the Fed, not everyone shares this same sentiment. GDP will rise at a rate of 1.9 percent in 2013, according to the median forecast of economists participating in a recent Bloomberg poll.

The 86 economists who took part in the survey indicated that this rate of growth would represent a decline from the 2.2 percent that was recorded in 2012. In addition to these projections that the rate of GDP expansion will drop between 2012 and 2013, data compiled by the media outlet indicates that the current economic expansion is the weakest since the one that followed World War II.

"There is nothing on the economy side to have precipitated such a seismic shift in their approach to QE," Stephen Stanley, chief economist at Stamford, Connecticut-based Pierpont Securities LLC, Connecticut, told Bloomberg. "They are finally starting to grasp what the signal from QE has done to the markets."

"QE was contributing to a market environment where people were taking too much risk," Stanley told the news source. "The beginning of tapering in September is a lot more predetermined than the Fed is letting on."

Rising hopes
While the aforementioned market experts may not seem too optimistic in their assessment of the economy, there are those who have a different sentiment. Data compiled by Bloomberg indicates that economists have predicted that growth will be higher in the third quarter of 2013 than it was in May, averaging 2.3 percent during the period between April and June compared to 2.2 percent in the prior month.

In addition, the estimates for 2014 economic growth provided by these market experts indicate that the nation's GDP will growth at a rate of 2.7 percent during the period, according to the news source.

In addition to these optimistic predictions, Bernanke has indicated that the members of the FOMC are "paying close attention" to how global asset markets could potentially be altered by the use of QE, Bloomberg reports. "If a frothy asset price were to reverse, what implications would that have for the broader economy?," he asked.

Finally, the head of the Federal Reserve noted that a great deal of attention has been given to this matter by the key policymakers of the nation's central bank, according to the news source.

If you want more free trading education, you can find it at TradingPub, home to some of the top investors and traders in the industry.