Does the Fed being at the ready with QE3 bring market uncertainty?
*Financial Times, by Robin Harding, February 29, 2012
”Ben Bernanke struck a downbeat tone on the health of the US economy – in spite of an upward revision of growth in the fourth quarter of 2011 – leaving it unclear whether the Federal Reserve would further ease monetary policy.
In testimony to Congress on Wednesday, the Fed chairman said that the labour market was doing better, but the fundamentals supporting consumer spending ‘continue to be weak.’
Mr Bernanke’s cautious comments came as the Bureau of Economic Analysis revised up its growth estimate for the fourth quarter of 2011 from an annualised rate of 2.8 per cent to 3 per cent. Most of that growth came from an inventory build-up, with growth in final sales to domestic purchasers, a crucial measure of demand in the economy, revised up only from 0.9 per cent to 1.1 per cent.
Mr Bernanke’s comments suggest that the Fed has made no decisions about another round of quantitative easing — sure to be nicknamed QE3. The central bank’s policy will depend on whether or not consumer demand follows the improvement in the labour market.
‘In light of the somewhat different signals received recently from the labour market than from indicators of final demand and production…it will be especially important to evaluate incoming information to assess the underlying pace of economic recovery,’ said Mr Bernanke.
The absence of any hints on further Fed easing jolted financial markets with gold dropping 2.9 per cent to $1,731 an ounce and the yield on 10-year US treasuries rising five basis points to 1.98 per cent.
‘I think the gold guys thought Bernanke would be more positive about the prospects for QE3,’ said Michael Kastner, principal at Halyard Asset Management.
Mr Bernanke said that the drop in the unemployment rate from 9 per cent last September to 8.3 per cent in January had been ‘somewhat more rapid than might have been expected,’ given that the economy was not growing that fast.
‘The fundamentals that support spending continue to be weak: real household income and wealth were flat in 2011, and access to credit remained restricted for many potential borrowers,’ said the Fed chairman. ‘The job market remains far from normal.’ ”
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