Talk of Fed Exit Jumps the Gun (Reprise)
The major U.S. stock market averages are starting the week in record territory after the Dow Jones Industrial Average (DJI) and S&P 500 Index (GSPC) closed at new record highs last Friday. Last week marked the third-straight week of gains for the markets. The Dow and S&P have gained more than 14% year-to-date.
The Federal Reserve’s aggressive stimulus measures have been largely credited for the meteoric rise in stocks. Last September the Fed announced it would expand its bond-buying program to a tune of $85 billion a month ($40 billion in mortgage-backed securities and $45 billion in longer-term Treasury securities).This unprecedented move by the Fed, along with the central bank’s decision to keep lending rates near zero until the jobless rate falls to 6.5%, has been the Fed’s antidote to sluggish economic growth.
The results have been mixed: equities are trading at record levels while growth limps along. The U.S. economy grew at a 2.5% annual rate in the first quarter of last year and 0.4% in the last three months of 2012. The national unemployment rate was 7.5% in April and there are at least 11.7 million individuals currently seeking employment.
Related: As Stocks Rise, Frustrated Investors Vent About Ben Bernanke
Now, Fed officials are preparing an exit strategy for their bond-buying program, reports The Wall Street Journal. The Fed will take “careful and potentially halting steps” so the markets will have time to adjust and react, thus preventing a tailspin and massive sell off.
“This could be part of the Fed's more general campaign to make sure the markets don't react too strongly to the first hint of a wind-down,” says former Fed Chairman Don Kohn, now senior economic strategist at Potomac Research Group.
According to Yahoo! Finance Senior Columnist Mike Santoli, there are two takeaways investors can glean from the WSJ report: Fed officials are “agnostic” about when and at what pace they will rein in their stimulus spending and they’ll take “their cues from the economic data, not just the market.”
The Fed’s bond-buying program may be coming to a close but that does not mean the Fed won’t attempt to jolt the economy with one last stimulus injection, adds The Daily Ticker’s Aaron Task. The Fed still believes a “highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens” according to its March FOMC statement.
All that said, a pullback in Fed policy does not necessarily portend a market crash, adds Santoli. By the time the Fed concludes its bond-buying program, the economic fundamentals may be strong enough to support a higher market.
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