Bernanke’s Monetary Stimulus Comment Sends Mixed Signals

May 23, 2013
By Vlad Karpel


Bernanke should start making up his mind on Fed stimulus plan.

Despite economic upsides, Federal Reserve Chairman Ben S. Bernanke, together with other Fed officials, announced Wednesday that they might pull back on their efforts to stimulate the economy. Mr. Bernanke suggested in Congress that they should begin tapering the monthly government bond purchases as early as next month. However, minutes of the Fed’s meeting on Wednesday also said that they are waiting for signals such as an upswing in the job market and a decline in unemployment before they start retreating from bond purchases.

So, what’s really the deal?

Mixed signals on Wall Street over the Fed’s intentions led to a confusing day in the stock market. The major indicators were up in the morning after Mr. Bernanke testified to a Congressional committee but then fell sharply after the meeting minutes were disclosed.

“A premature tightening of monetary policy could lead interest rates to rise temporarily but also would carry a substantial risk of slowing or ending the economic recovery,” Bernanke said.

The Fed intends to ease the stimulus according to the consensus of the next few meetings. Right now, Bernanke is still clamoring for a unified strategy. Still, many analysts said the odds were against a change of direction at the Fed’s meeting next month.

Mr. Bernanke told Representative Kevin Brady (R-Tx.), chairman of the Joint Economic Committee, that whenever the stimulus began to pullback, it will not be an “automatic, mechanistic program. Any change would depend on the incoming data.”

“It’s been on the minds of committee members, but I don’t think the minutes mean they’re going to collectively take their foot off the gas in June,” said Erik Johnson, an economist with IHS Global Insight.

Interest rates are currently at all-time lows but stimulus tapering will probably cause an increase in bond yields. This will affect the market for government and corporate bonds. Trading on Wednesday sent the stocks higher as Bernanke testified before the Congress. This means that the market has positive sentiments on the Feds stimulus plans and monetary policies.

However, before closing, the traders knew about the details of the minutes of the Fed’s meeting as well as Mr. Bernanke’s comments. The stocks, commodities and bonds fell as the market received mixed signals from Bernanke’s testimony and the minutes of the meeting. The minutes said, “A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth.”

In response, the Standard & Poor’s 500-stock index finished the day at 1,655.35, down 13.81, while the Dow Jones industrial average fell 80.41 to 15,307.17. The tech-heavy Nasdaq index, which has been on a tear lately, sank 38.82 to 3,463.30, or slightly over 1 percent.

Mr. Bernanke indicated that he was not particularly worried that the stock market was moving into bubble territory, despite the 16 percent surge in the S.& P. 500 since the beginning of the year.

“Our sense is that major asset prices like stock and bond prices are not inconsistent with fundamentals,” he said. Commonly used yardsticks for measuring the value of stocks, like price-to-earnings multiples, Mr. Bernanke concluded, are “fairly normal.”

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