Uncertainty lingers until Fed makes clear its stance on QE programme

In his semi-annual testimony before the US Congress, Fed chairman Ben Bernanke said the central bank might taper off its bond purchases, or it could increase bond buying again if the economy deteriorates. This statement reinforces the importance of relying more on economic indicators. Unfortunately, the data that came out after that testimony were inconsistent regarding the direction of the US economy. 

At the latest meeting of the Federal Open Market Committee on July 30-31, while recent US economic figures had shown signs of improvement, the Fed avoided giving any clues regarding the tapering of QE. Instead, the FOMC commented that the inflation rate was too low. Investors have therefore once again been left with only curiosity.

Some significant US economic data released during this period can provide us with a signal of that country’s future direction. The job market seems to send the strongest sign of improvement, with the unemployment rate dropping from 7.6 per cent in June to 7.4 per cent last month. Furthermore, the non-farm payroll, though below market expectations, is getting higher, and the ADP national employment numbers showed that 200,000 jobs were added in July, beating the expectation of 180,000. Additionally, gross domestic product grew by 1.7 per cent in the second quarter over the first, better than initially forecast at 1.0 per cent. However, growth in the housing market is still uncertain, though on the recovery track, similar to the inflation rate.

While these first questions have no answer yet, the next one is: “Who will be the next Fed governor?” Bernanke’s second term as chairman will end on January 31. It is widely assumed that he will not continue in the post. The markets are waiting to see who will be next, as this might indicate the Fed’s policy stance in the future. There are currently two front runners: Janet Yellen and Lawrence Summers. 

Yellen is currently a Fed vice chairwoman, who favours a dovish approach in policies. She has been in this post throughout the economic crisis and participated in the decision to launch QE. Therefore, many believe she is the best person to take us through the exit from the programme. If Yellen is indeed nominated, she would be the first woman to take this position. 

Summers is being seriously considered by President Barack Obama, as he is one of his top economic advisers and was treasury secretary in the administration of Bill Clinton. In that capacity he experienced the Asian financial crisis, and he is considered very good at crisis management. 

The first questions might be answered at the FOMC meeting scheduled for September 17-18, and the one about Bernanke’s successor will be clarified some time this autumn. In the meantime, the only certainty is that markets will be vulnerable and have unclear direction until these questions have been answered.

 

Duangkamon Phunkaew is assistant vice president, treasury division, Bangkok Bank.