Well, that went as planned. Reassuring comments from Ben Bernanke before a Congressional committee soothed investor fears that the QE party was over and that central bank stimulus would live on.
At least in the short term, anyway.
The money line from Bernanke went something like this:
“A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further.”
In other words, don’t expect the Fed to get hawkish anytime soon because that could end the recovery.
So, the market is rallying today — doesn’t it only seem to go up lately? — for obvious reasons. But the real thing investors should worry about is the eventual tightening that will have to take place, and the fact that Wall Street is on pins and needles for a sign that the Fed will finally be “taking away the punch bowl.”
Because nobody wants to be the last one to the exit when they do.
To me, that sets us up for some significant volatility risk in the summertime. Because in a low-volume and low-news environment, all it would take is one comment out of context to spark a frenzy.
We’ve had plenty of mid-year meltdowns since the financial crisis due to the dynamics of a summer lull. In 2010, the rebound off the bear market lows lost momentum in summer on a spate of troublesome economic news — not to mention the Flash Crash shenanigans sparking fear of market manipulation.
In 2011 it was the debt ceiling and S&P downgrade of U.S. debt that gutted the market. In 2012, borrowing costs in Spain and Italy spiked to over 7% and led to fear of a EU breakdown.
Could 2013 be the year that Bernanke & Co. ruin our summer?
In defense of the Federal Reserve staff, I think that the officials there are very shrewd about how their comments can move markets. Ben Bernanke is notoriously cautious and confusing in his statements because he doesn’t want to create a panic or unjust euphoria.
Also in defense of the Fed: The stimulus efforts have been a remarkable and unconventional effort to keep the economy moving, but there has to be a next chapter eventually — either with Congress taking the baton or the broader economy coming back in full force with organic growth.
The stimulus measures of the Federal Reserve were never intended to last forever or carry the full weight of the downturn, and it’s not Bernanke’s fault that bond-buying measures must be wound down in the next few years.
But that’s not to say there won’t be some fireworks on Wall Street when we find the way forward.
And in the slow days of summer, all it would take is a rumor or an unguarded comment from a Fed source to set off the fireworks a bit early.
- Fed insider Jon Hilsenrath penned a must-read piece recently about the central bank mapping an exit from stimulus policies. (WSJ)
- Earlier, the New York Fed president said it would take three or four months before the central bank had a clear economic outlook. (MarketWatch)
- Full Bernanke transcript from May 22. (ForexTV)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.