Has The Market Misread Bernanke?

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Has The Market Misread Bernanke?

That is the question, isn’t it?  With Fed officials coming out in droves to clarify Fed’s position on bond purchases just few days after the FOMC Press Conference, especially after seeing the sharp sell-off in equity markets, it does make one wonder if it’s indeed Fed’s intention to signal strong USD at this time.  Well, here are some comments today from Fed Dudley and Bullard:

  • (US) Fed’s Dudley: Policy cannot work without financial stability, Fed should act to prevent financial instability.  Market conditions should be considered when monetary policy is implemented, monetary policy in the last few years has not been accommodative enough. Fed has come up short on both of its mandates, inflation and employment.
  • (US) Fed’s Bullard: Reiterates the Fed may need to increase QE if inflation slows; disinflation prompted by slowdown in China and Europe – interview

Furthermore, it has also been reported that Feds have accounted the potential market sell-off and have warned that a lasting decline in stocks, rise in yields could be harmful to the economic outlook, which could in turn delay the taper further (beyond the proposed timeline of 2013).

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Additionally, the man known as the “Fed Whisperer” Hilsenrath of the Wallstreet Journal posted in his blog stating that the market may be overlooking dovish signals by the chairman in the press conference and might be misreading the Fed’s message.  He stated the following reasons:

Mr. Bernanke emphasized that even though the Fed might pull back on bond-buying later this year — which is akin to easing your foot off the gas pedal of a car — it would be a long time before it took the more aggressive step of raising short-term interest rates — which is akin to pressing the brake. He also emphasized in his prepared statement that when rate increases come, they “are likely to be gradual,” a hint of future caution about rate increases he hasn’t given before.

Mr. Bernanke suggested the Fed could keep short-term interest rates near zero even longer than previously planned. Since December, the Fed has said it would keep short-term rates near zero at least as long as the jobless rate is above 6.5%. In his prepared statement, Mr. Bernanke emphasized that rates could stay low for a while even after unemployment falls below 6.5%, particularly if inflation stays low. “The more subdued the outlook for inflation,” he said, “the more patient the [Fed] would likely be,” he said. In the question-and-answer session he went even further and said for the first time that the Fed might even lower that 6.5% threshold.

Fifteen Fed officials expect the central bank won’t need to raise short-term interest rates until 2015 or 2016 and just four said it would need to do so before then. That was a slight move away from early tightening: Previously five anticipated tightening before 2015. The average short-term benchmark rate expected at the end of 2015 among Fed officials didn’t change much – it was 1.34%, compared to 1.30% in March. The median expected rate – meaning half saw one higher and half saw one lower – remained unchanged at 1%.

Mr. Bernanke said “a strong majority” of Fed officials had concluded the Fed won’t ever sell its growing portfolio of mortgage-backed securities, and instead will let it shrink as mortgages are paid off. In the past the Fed had said it might someday sell these bonds, a threat to any investor who held the bonds. He was more emphatic than ever Wednesday about not selling.

A hawk became a very vocal dove. St. Louis Fed president James Bullard dissented from the Fed’s policy statement, saying he thought the central bank should be leaning toward even easier money policies. In the past, Mr. Bullard has tended to side with Fed “hawks” opposed to easy money policies. In a statement his office released Friday morning, he argued that the Fed’s decision to lay out a plan for pulling back easy money was “inappropriately timed” because inflation and economic output have been soft.

Mr. Bernanke emphasized the conditional nature of the Fed’s plan to withdraw bond-buying. “If you draw the conclusion that I’ve said that our policies, that our purchases, will end in the middle of next year, you’ve drawn the wrong conclusion, because our purchases are tied to what happens in the economy … we have no deterministic or fixed plan.”

So all in all despite of the sharp flow to safety and the sell-off in the Equity market, I believe Hilsenrath is correct and the market has overreacted, at least for the time being.  I would be looking for USD correction in the coming days and at least for the short-term, I’d be looking to go LONG on EURUSD.  All in all I believe either the market realizes on its own that it has misread Fed’s message or Bernanke will come out and clarify.  It should be just a matter of time.
henry-sig

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About Henry Liu

My name is Henry Liu and I am a Forex Trader and Mentor. I help traders achieve consistent income trading Forex while spending less time trading. My focus in trading is a combination of Fundamental Analysis, Technical Analysis, and Market Sentiment. Far too many retail Forex traders concentrate on just one aspect of trading, technical analysis, and ignore everything else; it is my goal (and vision) to educate every trader on how to take advantage of news trading and become more balanced traders.

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