Equity markets in Asia and Europe have moved higher in trading on Friday after sentiment improved in the United States on Thursday over the course of the Federal Reserve’s closely watched monetary stimulus program.
Yesterday afternoon U.S. equity markets surged to gains over 1 percent before the closing bell after a Wall St. Journal article by John Hilsenrath referenced some officials who said an adjustment in the Fed’s $85 billion a month bond-buying program won’t mean that it will end all at once or mean the Fed is anywhere near to raising short term interest rates.
Volatility and fear has crept back into global markets following Fed Chairman Ben Bernanke’s comments during a Q & A Congressional on May 22nd when he admitted the Fed could in the next few meetings take a step down in their pace of purchases if the Fed sees continued improvement in the economy as well as confidence it will be sustained.
Some economists believe that the Fed Chairman Bernanke’s comments about a “step down in rate of purchases” means that de facto the Fed is beginning to hint or telegraph to the market that it has near term plans for a shifting or tapering of its $85 billion monthly bond buying program. But others are not so convinced.
Next Tuesday and Wednesday Fed members will convene in Washington D.C. for their June meeting.
Chairman Bernanke will make some public statements on Wednesday that are expected to provide the market with more clarity about the Fed’s intentions with its $85 billion a month bond buying program that has successfully lowered interest rates, spurred a U.S. economic recovery, and provided more liquidity for emerging markets around the world from international investors seeking higher yield returns.
The market has good reason to question the direction the Fed plans to take with its monetary stimulus program.
Although the U.S. economy is clearly improving, the latest round of economic data in the U.S. has shown modest improvements with some mixed results.
Steady gains in non-farm payroll job reports over the past six months has shown averaged job gains over 194,00 per month compared with averaged monthly gains of 140,000 in the previous six months.
And despite those gains the unemployment rate moved higher in May to 7.6 percent from 7.5 percent in April largely due to more workers entering the labor force.
Chairman Bernanke has made it clear that the U.S. unemployment level and rate of inflation are highly important factors that will weigh heavily when assessing the health of the economy and whether the market is ready for the “step down in the rate of purchases.”
Bernanke mentioned in the past that ending the Fed’s monetary easing program will come after the U.S. unemployment level drops to 6.5 percent which is now over one full percentage point away while the inflation rate rose only 1 percent in April, notably below the Fed’s inflation target of 2.5 percent.
The nebulous talk of “continued improvement in the economy” and “confidence it will be sustained” remain open for debate and interpretation, especially since many of the recent economic gains in the U.S. economy has come from the solid support from the Fed’s monetary stimulus program
Changing the course of the Fed’s monetary stimulus program (QE3) will result in some natural adjustments in the economy, including a rise in the 10 year Treasury which hit an all time low of 1.40 percent in July 2012 and rose to as high as 2.26 on Tuesday before it dropped to 2.20.
When the rate on the 10 year Treasury note adjusts, mortgage lenders will react and change the current rate for 30 year fixed rate mortgages.
Yesterday Freddie Mac says that the rate on the 30-year fixed mortgage increased to 3.98 percent, up from 3.91 percent last week and the highest since April 2012. Fears that the Fed Reserve will taper its bond purchases has helped to drive rates higher in recent weeks.