Hints from the U.S. Federal Reserve this week that the quantitative easing (QE) taper is near pushed the Dow down 105 points Wednesday – but the idea of less Fed stimulus has caused much more turmoil in certain overseas markets.
The problem: A corresponding hike in U.S. debt yields has fueled higher borrowing costs around the globe. This has led to the flight of cheap capital out of emerging currencies and markets.
That triggered the following reactions:
In one of the most highly anticipated releases of the year, the Federal Open Market Committee (FOMC) meeting minutes from July 30-31 were released today (Wednesday).
They will be picked apart for days – but here's what you need to know.
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Thursday, Aug. 22 marks the start of the annual Fed meeting at Jackson Hole, WY – although this one will be much different than those of years past…
Every year since 1981, the U.S. Federal Reserve Bank of Kansas City has invited a slew of economic luminaries to its annual symposium in tony Jackson Hole.
The Jackson Lake Lodge, nestled among two lakes on the Willow Flats that front the imposing Teton Range, can host central bankers from any one of the world's largest economies, as well as cutting-edge economic thinkers and theorists from global academia.
Global market- and bank-watchers look to the Fed meeting at Jackson Hole as a source of critical information regarding potential shifts in macroeconomic policy.
Investors look to the meeting to bring a healthy, if fleeting, shot in the arm to the markets and share prices. Nearly any unexpected remark or errant word coming from the proceedings has the ability to rock the markets.
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On Tuesday, Federal Reserve Bank of Chicago President Charles Evans announced that he wouldn't be surprised if the central bank begins to taper its $85 billion monthly bond-buying program in September.
Evans is the third official this week to signal a QE taper. Richard Fisher, president of the Dallas Fed, and Dennis Lockhart, president of the Atlanta Fed, parroted Evans' sentiment.
While Fisher indicated he would prefer to cut back bond purchases in August, Lockhart stated a preference for a September QE taper, although the Fed could wait longer if economic growth and unemployment trends reverse.
But it is Evans' announcement that is the most important. Evans is a member of the activist wing of the Federal Reserve. These members strongly support unconventional monetary policies such as bond buying, which are designed to reduce borrowing costs to spur aggregate demand and hiring across the country.
His views reflect those of the majority of members of the FOMC, the Fed's monetary policy committee.
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The Federal Open Market Committee (FOMC) meeting ended today (Wednesday) with word that the Fed plans to the stay the course on QE for now, backtracking from earlier hints it might begin tapering this fall.
"For all those looking for clear guidance on when quantitative easing will end, well, you will have to wait a little longer," Joel Naroff, president and chief economist at Naroff Economic Advisors Inc., wrote in a research note. "Indeed, there may have been some walking backwards today."
Money Morning Capital Wave Strategist Shah Gilani said it's no surprise the Fed has backed away from talk of tapering.
Says Obama:
Larry Summers for Fed Chief… He's got my vote. Absolutely!
Why? You just have to get to know the guy and you'll see he's perfectly qualified to head the Federal Reserve.
Here's just part of his resume.
From 1982-1983, Larry Summers was on staff at Ronald Reagan's Council of Economic Advisers. That's where Lawrence of Enablers earned his "Deregulate Everything" T-shirt.
After his brief stint on the Gipper's Council, where he was taught how real pros corral free markets for personal profit, the Enabler headed back to Harvard to teach kids (and himself) how to squeeze personal wealth out of mere economic theory.
He got his next shot at stardom as Chief Economist of the World Bank in 1991. He was there until 1993.
While there he wasted no time shining a light on himself.
In a 1991 interview he famously said:
…
With Ben Bernanke prepared to step down as Federal Reserve chairman within the next year, the human resource debacle of locating the next Federal Reserve chair is underway.
Despite reports of Timothy Geithner, Alan Blinder, or Roger Ferguson being modest replacements (the latter I personally endorse), it seems that the candidacy has been narrowed to two.
The next Federal Reserve chair will be a choice between one of the biggest enablers of the financial crisis, Larry Summers, and the more-qualified, but politically unknown, Janet Yellen.
Here's my insight on each candidate…
If you wanted a clear picture of Federal Reserve strategy from the Ben Bernanke testimony to Congress this week, you were disappointed.
This week's Bernanke testimony highlighted the mixed signals Bernanke has been sending to markets – part of the reason Money Morning Chief Investment Strategist Keith Fitz-Gerald has said Bernanke is engaging in "monetary drunk driving" and is "jerking the wheel back and forth all over the road."
That's why two Bens showed up at his final Humphrey-Hawkins appearance before Congress: Accommodative Ben and Tightening Ben.
Bernanke said the $85 billion a month bond purchase plan would be slowed later this year if the U.S. economy stayed on its present course.
But he also told Congress the Fed was not backing away from its very easy monetary policy. He said "a highly accommodative monetary policy will remain appropriate for the foreseeable future."
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Periodically, each Federal Reserve Bank gathers anecdotal information on current economic conditions in its geographic district.
Banks take into consideration the outlook of regional Fed bank directors, interviews with key business contacts, economists, market experts, and other sources.
This information comes out 8 times per year in a compilation report dubbed the "Beige Book" – it's essentially a summary of economic activity in the 12 Fed bank districts as prepared by a designated Federal Reserve Bank on a rotating basis.
Today (Wednesday), the Federal Reserve released its latest.
Therein, manufacturing reportedly expanded in most districts.
Consumer spending, auto sales, transportation, commercial real estate, and banking has improved.
Hiring activity modestly improved, but three districts noted businesses' reluctance to hire permanent workers. We're likely seeing the effects of Obamacare.
Notably, housing demand and construction activity increased at a moderate to strong pace in all districts.
Meanwhile, tourism and agricultural conditions seemed bogged down by bad weather.
In sum, overall economic activity has reportedly continued to increase at a modest pace since the last Beige Book, released on June 5.
Sounds good, but how about some specifics?
Here are some interesting economic tidbits I came across while perusing July's Beige Book, broken down by district:
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There's a key market-moving event this week investors can't miss: the semi-annual Ben Bernanke monetary policy testimony before Congress on Wednesday (House) and Thursday (Senate).
Congressional legislation known as Humphrey-Hawkins (now expired) required the Federal Reserve's Open Market Committee to report to Congress on both the state of the U.S. economy and monetary policy twice a year (February and July). The Fed Chairman testifies before Congress in conjunction with the report.
Traditionally, it had been one of the most important public appearances by the Fed Chairman, back when speeches were rare. But now with news conferences after many Fed meetings, these appearances are less important.
However, this time may be different, as it will be Ben Bernanke's last time in front of Congress before his term ends in 2014. The testimony may once again be a market moving event due to the market's recent concern about the Fed's 'tapering' of quantitative easing (QE).
The markets have been confused lately by seemingly contradictory statements coming from various Fed members and particularly from Bernanke himself.
In fact, Bernanke's actions lately remind me of Batman villain Two-Face, aka former District Attorney Harvey Dent.
For example, one time he said that winding down QE may happen as soon as the middle of next year. But then, like last week, he flips saying the Fed will not taper the $85 billion a month bond purchasing plan until the U.S. economy is stronger.
He said, "highly accommodative monetary policy for the foreseeable future is what's needed [for the economy]."
Bernanke added that there would not be an automatic rise in interest rates either when the U.S. unemployment hit the Fed's target of 6.5%.
These statements sent the stock market solidly higher with both the S&P 500 and the Dow Industrials nearing their record highs. The S&P 500 and Dow Jones Industrial Average hit new record highs Monday closing at 1,682.50 and 15,484.26.
Traders believe the 'Bernanke put' was back in play. That is, Bernanke will do everything he can to keep stock prices higher.
So which Ben Bernanke will testify before Congress this week? Accommodative Ben or Tightening Ben?
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