Continued from page 1
As of the first quarter of 2013, the world’s centralbanks had injected over $12 trillion of stimulus intotheir respective economies since the start of the glob-al financial crisis. This is in addition to cutting inter-est rates to near generational lows. Markets havenow become accustomed, if not reliant, on accommo-dative monetary policy.This reliance became apparent through investors’reaction to even the hint of stimulus tapering. On May22
, the head of the US Federal Reserve, BenBernanke, told Congress that the central bank mightwind down its monetary easing stance. The re-sponse: equities around the world sold off and inter-est rates rose quickly.Of course, this reaction was not contained to the US.Interest rates were impacted throughout the world. InNorth America, mortgage rates have moved up quick-ly and some observers say it is already impacting USreal estate sales. As the chart above shows, the“taper tantrum”
caused the US 30 year mortgage rateto rise by 1.15% in a two month period and mortgagerefinancing activity simultaneously fell by more than50%.Offsetting this interest rate spike is the fact that homeaffordability in the US remains comfortably above his-toric levels.
The reaction from the markets was so quick andstrong that the Federal Reserve attempted to walkback the earlier comments and go out of its way toclarify what Bernanke meant to say. It should be not-ed that the minutes from recent Fed meetings revealthat Bernanke was not alone and had support fromother Fed governors to begin trimming monetary stim-ulus if necessary.
What Bernanke actually said according to the tran-scripts from the Federal Reserve is that the improvinglabor markets and the expected gradual rise in infla-tion towards its targeted two percent rate would dic-tate further policy ac-tions such that,
“… if the subsequent data remain broadly aligned with our cur-rent expecta-tions…,we would con-tinue to reduce the pace of purchases inmeasured stepsthrough the first half of next year.”
If that were notenough to make themarkets to perhapsrethink their reaction,Bernanke also stated that he wanted to
“… empha-size once more the point that our policy is in no way predetermined and will depend on the incoming dataand the evolution of the outlook.”
In short, the Fed willlook at the data and decide the appropriate course of action in the future.
Perhaps the most important variable in determiningFed policy will be US jobs data. Even the traditionalmain focus of inflation will likely play second fiddle tothe unemployment rate. As the chart on page 3 shows, the US economy hasbeen able to add over 7 million jobs over the last 40months. Although this might sound impressive atfirst, the job additions work out to less than 200,000 jobs per month. To put this into perspective, the USeconomy needs to generate about 350,000 jobs per month to keep up with the growth of the labor force
Continued on page 3