It looks like Mr. Bernanke may want to go out in style. Just about the time investors around the globe had concluded that there was simply no way the Fed could begin tapering the size of its QE programs before March or April of next year, it looks like Wednesday's FOMC statement put the taper back on the table.
The thinking had been simple. Given the state of state of dysfunction seen in Washington D.C., most economists had come to the conclusion that the Fed would need to keep its foot on the gas pedal to make darned sure the economy kept moving forward.
The Man Who Saved the World
Ben Bernanke will likely be remembered as the man most responsible from keeping the global banking system from collapsing during the credit crisis in 2008 and early 2009. Without Bernanke thinking outside the box - way outside the central banker box - the world's banks would have likely wound up in, well, a world of hurt.
It was Bernanke and friends that engineered the mergers on Wall Street. No, it wasn't fair. But without the swift action, the big banks on Wall Street would have all gone the way of Lehman Brothers in a hurry.
It was also Mr. Bernanke that managed to come up with creative ways to first push interest rates to all-time lows and then keep them there - for a VERY long time.
The idea was two-fold. First, the Bernanke Fed wanted to keep the U.S. out of a deflationary spiral. Every economist worth their salt knows what has happened to Japan since 1989, and Gentle Ben appeared to be hell bent on not letting the U.S. go down that path.
The second goal was to create a little asset inflation in housing, stocks, etc. This is also known as the "wealth effect." It turns out that consumers tend to spend more when they see their net worth rising.
Thus, Bernanke & Co. pulled out all the stops and did their darndest to keep interest rates low and the economy moving forward. And had the plans not been interrupted each of the past four years by crises occurring both across the pond and right here in Washington D.C., the plan might have worked.
But unfortunately for Mr. Bernanke and the rest of the country, Europe's debt mess and the complete and utter embarrassment that passes for leadership (on all sides) in this country has managed to test the Fed's plans as U.S. economic growth remains punk.
Still Mucking Up The Works
Despite the fact that the professional politicians in D.C. managed to avoid defaulting on the country's debt this time around, the bottom line is that the can was simply kicked down the road. And not very far as the next deadline for a budget is early December and then there are various other deadlines slated for January and February.
It is for this reason that most analysts pushed out their estimates for when the Fed would begin to taper the level of its QE purchases (the FOMC currently buys $85 billion a month of bonds and various debt instruments) from "Octaper" to March/April. With the economy still not hitting on all cylinders and the dingbats in D.C. likely to muck up the works again in a couple months, economists assumed the Fed couldn't afford to stop.
Is The Taper Back On?
However, in Wednesday's FOMC statement, the following sentence got a lot of attention:
"Taking into account the extent of federal fiscal retrenchment over the past year, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program as consistent with growing underlying strength in the broader economy."
In English, the FOMC was saying that despite the idiocy in D.C., the economy seems to be doing okay. In addition, this was the same language the Fed had used in September, which caused analysts to assume that an "Octaper" was on the way. Therefore, the current assessment is that the Fed may still be considering starting to taper in December.
Market Reaction Was Telling
Although the algos traditionally push the stock market back and forth in a volatile fashion after FOMC announcements, the action in the dollar and the bond market confirmed the idea that the taper just might be back on the table. While the action is stocks was tough to decipher, bond yields spiked higher and the dollar bounced up from the lows of the year. 'Nuf said.
So, while the big banks and hedge funds may have been planning on playing the "liquidity trade" for another five or six months, yesterday's statement from the Fed may be causing them to rethink their thesis. Therefore, the long-awaited pullback in stocks may start to materialize. So stick around, this just got interesting.
Turning to this morning... With the FOMC statement out of the way, traders will likely return their focus to earnings, the macroeconomic news, and outlook for a budget deal in Washington. This morning, we see mixed results from the overseas markets with Asian indices lower and European bourses modestly higher. Here at home, earnings from Facebook have helped improve the mood after yesterday afternoon's FOMC-related selloff. However, the futures are currently pointing to a flat-ish open on Wall Street.
Positions in stocks mentioned: none
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