Riding Out Growing Volatility About Monetary Stimulus

Businessman Bouncing Over Stock ChartU.S. equity futures are pointing higher on Wednesday following an across the board sell off on Tuesday with the Nasdaq and S&P 500 both declining over 1 percent and the Dow dropping .76 percent after the Bank of Japan made it clear that it had no plans to extend its aggressive monetary stimulus program any further.

Investors also remained uneasy that the Federal Reserve may taper or shift its purchases of $85 billion in U.S. treasury securities each month.

Volatility resurfaced in the market with the volatility index (VIX) up 10.56 percent on Tuesday and the 10 year Treasury spiking up to 2.2690 before closing lower at 2.1950.

With the next Fed meeting still one week away, investors are increasingly on edge and faced with having to digest a mixed bag of U.S. economic data to gauge whether the Federal Reserve will continue to season the U.S. economy with continued asset purchases of $85 billion each month through the remainder of 2013 or else begin to taper their purchases in September.

Dean Curnutt, President and CEO of Macro Risk Advisors said yesterday on Bloomberg’s Street Smart with Regan and Johnson that the markets are incredibly anticipatory and Fed Chairman Bernanke floated the idea of tapering as a “trial balloon” to see what the reaction would be in the markets.

“What we’ve seen in the last couple weeks alone is that markets are incredibly anticipatory so Bernanke uttering just even the faintest hint of tapering has everybody struggling to readjust what that means longer term.” Curnutt said.

The Bernanke hint that Curnett spoke about are recent comments from Chairman Bernanke during a Q & A Congressional testimony on May 22nd when he responded to questions about adjusting the Fed’s treasury purchases of $85 billion each month which has helped to propel the U.S. equity markets to record levels.

Here are the direct quotes from Bernanke’s testimony on Capitol Hill from May 22nd concerning the Federal Reserve’s monetary stimulus program, known as quantitative easing (QE3).

Bernanke on the flow of asset purchases:

“The program relates the flow of asset purchases to the economic outlook. As the economic outlook  and particularly the outlook for the labor market improves in a real and sustainable way, the committee will gradually reduce the flow of purchases.

“I want to be very clear that a step to reduce the flow of purchases would not be an automatic, mechanistic process of ending the program. Rather, any change in the flow of purchases would depend on the incoming data and our assessment of how the labor market and inflation are evolving.”

Bernanke on the adjustment of asset purchases:

“If we see continued improvement and we have confidence that that’s going to be sustained then we could in the next few meetings take a step down in our pace of purchases. If we do that it would not mean that we are automatically aiming towards a complete wind down. Rather we would be looking beyond that to see how the economy evolves and we could either raise or lower our pace of purchases going forward.”

 

 

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