Stocks worldwide fell after Federal Reserve Chairman Ben S. Bernanke’s June 19 statement on U.S. monetary policy. Emerging markets were hit especially hard. The statement, and Bernanke’s comments afterward, shouldn’t have come as a surprise -- so what’s going on? Was the sell-off a meaningless overreaction, or a warning of new financial stresses ahead?
A bit of both. Bernanke said the Fed’s program of quantitative easing would be reduced over the next year or so, and probably ended in 2014 -- so long as the economy continued to strengthen as the Fed expects. He also reiterated his plan to keep short-term interest rates on the floor for longer than that. Again, none of this was unexpected. It would have been shocking if he’d said anything else.
In that sense financial markets overreacted, as they are apt to do. But Bernanke also focused investors’ attention on the challenges of a return to normalcy in global financial conditions -- because that’s what the tapering of QE and the (still distant) prospect of higher short-term interest rates represent. Monetary policy quite rightly went far out on a limb in the aftermath of the recession, and getting off that limb was never going to be easy. Anxiety over this maneuver isn’t misplaced.
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