This video does a great job to explain what I wanted to talk about from the previous week. However, I know you’d be devastated if you didn’t get a taste of my elegant writing. Have no fear.
As he passed the torch to Janet Yellen, Ben Bernanke announced in his last FOMC meeting that the FED would continue tapering QE by decreasing the bond buying program by another $10 billion. This brings the total of the program down to $65 billion of treasury bonds and mortgage-backed securities. FED officials decided that the American economy is strong enough for a second round of tapering, despite recent mediocre data including a weak jobs report.
Once again, this second step of tapering will end up lowering US stock markets, raising interest rates in the United States and appreciating the US Dollar in value against other currencies. This is having a profound on effect on Emerging Markets such as Turkey and South Africa where a devaluing currency and a rise in American interest rates is causing investors to flee those markets. In response, Emerging Markets have resorted to raising interest rates but so far they have not been able to regain the losses to the value of their currencies. In response to the effects that tapering is having on foreign countries, FED officials have stated that their priority is to maintain the strength of the American economy and tthat if they succeed, then Emerging Markets would fare better off as well.
“Most projects start out slowly – and then sort of taper off.”
-Norman Ralph Augustine
On December 18th, following the final FED Open Market Committee meeting of the year, Ben Bernanke announced that the FED will finally begin ‘tapering’ its asset purchase program. Under the title of Quantitative Easing (QE), the FED had been purchasing $85 billion of treasury bonds and mortgage backed securities each month. However, after multiple indications that the US economy is hastening its recovery, the FED has decided to reduce that purchase by $10 billion to $75 billion per month.
Because this decision wasn’t unexpected and because it was only a modest reduction in asset purchases, stocks responded positively to the announcement. The Dow Jones Industrial Index rallied by 293 points to an all time high of 16,167.97.
As long as unemployment and GDP numbers keep improving, the FED is expected to keep gradually reducing its asset purchases in order to continue shrinking its balance sheet. Nevertheless, Bernanke states that the FED will still keep interest rates at near zero levels as long as unemployment exceeds 6.5%, which should be till sometime in late 2014 or early 2015.
On a final note, this was Ben Bernanke’s last FOMC meeting and press conference as FED Chairman. Janet Yellen will be taking over from Bernanke on January 31st of 2014. When asked about how he views his performance over the last 8 years, Bernanke said, “I hope I live long enough to read the textbooks.”
“Monetary policy cannot do much about long-run growth, all we can try to do is to try to smooth out periods where the economy is depressed because of lack of demand.”
Ladies and gentlemen, its official.
As many, including myself, had predicted, Janet Yellen has been nominated by President Obama to be next chairman of the Federal Reserve. Her nomination was almost a done deal when Larry Summers withdrew himself from the race. Since investors predict that Yellen will continue Ben Bernanke’s accommodative monetary policies, stocks rallied across America and emerging markets when the nomination was officially announced.