Friday Podcast 17th May 2013
Transcript of the Podcast
Hi this is your editor Arjun Parthasarathy speaking.
This Podcast topic is on “Fed Easing Stimulus and its Impact on Markets”
The US Federal Reserve Chairman, Ben Bernanke, in a testimony to the Joint Economic Committee of Congress on the 22nd of May, said that the Fed would be cautious in easing policy stimulus. He mentioned that the Fed would consider pulling back its asset purchase program in the next few meetings if the US economy showed enough progress. However the Fed Chairman did highlight the issues of unemployment, which at 7.5% levels is still well above the 6% required levels to pull the US economy on a higher growth path.
The Fed in its efforts to boost economic growth in the US is keeping interest rates at close to zero per cent and is buying USD 85 billion of bonds on a monthly basis. The Fed could lower or end bond purchases before raising interest rates. US stocks have benefitted from the Fed’s monetary stimulus with the Dow and S&P 500 trading at record highs. The USD has benefitted from the Fed’s policy stance with the USD index up by 10% over the last couple of years.
The reaction of the markets to the Fed’s testimonial suggests that paring down bond purchases could start sooner than later. Bond yields in the US rose with ten year US treasury yields closing at 2.03%. close to one year highs. US equity indices fell along with oil and gold prices. Global markets saw yields trend up in Japan, Germany and the UK as markets are starting to factor in a withdrawal of stimulus and improved economic growth prospects. Ten year government bond yields in Japan, Germany and UK are up 28bps and 20bps respectively over the last one month.
The questions to ask are will the Fed stop its bond purchases this year and if it does what will be the impact on markets in the long term? The Fed could well look to end its bond purchase by the end of calendar year 2013 as US economy is showing improvement with US existing home sales ticking up to its highest level in three and half years, the economy adding jobs on a monthly basis and retail sales picking up.
The markets are unlikely to react negatively over the long term to the Fed pulling back its stimulus. In the short term, markets may use the Fed’s testimonial as an excuse for correction at higher levels but in the long term equities and bonds of high yield countries such as India will do well. The reason for equities doing well as the Fed pulls back on stimulus is that economic recovery will be well in sight for the Fed to stop monetary stimulus.
The lack of artificial liquidity in the system will keep the USD strong, which in turn will keep commodity prices in check. The Sensex and Nifty will benefit from economic recovery in the US while Indian government bonds will benefit from low inflation expectations on the back of stable commodity prices.
The Fed’s stimulus withdrawal is more positive than negative in the longer term tough in the short term there could be correction in markets given that markets have risen considerably over the last few months.
Thank you for listening in. Have a good weekend.