The UK's leading market index, the FTSE 100, sees every constituent up this morning after Federal Reserve chairman Ben Bernanke's dovish comments last night. We've got some reaction to what was said below.
Michael Moran, Daiwa Capital Markets America:
Our conclusion is that the Committee will begin tapering the program later this year, although timing is uncertain. We had been viewing September as the most likely date to begin tapering, and we have not abandoned this view, but a case can be made for a later date.
Specifically, “about half” of the meeting participants expected that it would be appropriate the end the asset purchase program by the end of the year. Note, they wanted to end -- not taper -- the effort. Moreover, a “few” participants felt that the Committee could best foster its objectives by slowing or stopping the program in June -- that is, they wanted to begin tapering immediately.
If job growth remains at a pace close to that seen in recent months (approximately 200,000), the labor market will probably show sufficient improvement to induce the FOMC to taper its asset purchase program. The Q&A portion of Chairman Bernanke’s speech today also supported the notion that the Fed will begin tapering this year.
Jim Reid, Deutsche Bank:
The overall message from Bernanke was one of reassurance that "highly accommodative monetary policy" will continue "for the foreseeable future". In terms of the Fed's dual mandate Bernanke repeated the message that the Fed was not on target on its employment objectives, and low inflation signalled that more stimulus was needed. There was additional emphasis on low inflation when he said that the Fed remained committed to defending both an undershoot and overshoot in inflation. On the topic of fiscal policy, he added that it was too early to say whether the US had weathered the fiscal restraint in Washington - this perhaps ruling out the start of tapering in the summer. When asked if he would have done anything differently following the June 18th/19th FOMC, Bernanke indicated that he wouldn't. He said the market volatility of the past six weeks could have been much worse if he had kept silent on their plans for tapering, misleading investors into thinking the asset purchases could go on forever. Another interesting part of the Q&A came when he discussed financial conditions. Here the Chairman said that financial conditions had tightened and it's something that the Fed was watching. He added that "if financial conditions were to tighten to the extent that they jeopardise the achievement of inflation and employment objectives, then we would have to push back against that".
Kit Juckes, Societie Generale:
Did the Fed Chairman really say anything radical last night? The FOMC minutes had set the stage by giving us a re-run of the message that had been delivered in the post-meeting press conference and do nothing to alter a view that ‘tapering’ will be announced in September. What I heard from Bernanke was that tapering isn’t tightening (Wow!), that policy will remain very accommodative for a very long time, and that higher yields could alter taper-timing. I don’t see that as a radical but it has put a ceiling above yields for now, and markets can revert to data-watching mode. And it has knocked the dollar back and put a rocket under the S&P. 10yr Treasuries are now set to trade in a range over the summer (2.25-2.75%?). Credit spreads will tighten sharply as their greatest fear recedes. Emerging markets are going to get some respite.