Will the Fed reduce bond buying program?
By R Chandrasekaran
CHENNAI: It looks like that the U.S. Federal Reserve Chairman Ben Bernanke is keeping the markets guessing going by his remarks at the semi-annual testimony on Capitol Hill. He has been airing his views both in favor and against the bond buying program, though not aggressively.
The chairman told Congress that it sees the current economic condition to lead to commencing of reduced bond buying program during the later part of the current calendar year. However, he gave enough indications that the central bank will not skirt its responsibilities and will not mind reversing the bond buying program.
On June 19, Bernanke stirred the markets with his comments that it will start reducing the easy money policy by cutting down bond buying program from the original target of $85 billion a month. He indicated that this will commence later during the current year and may stop completely during the middle of next year.
The easy money policy came into existence to help the economy revive from the slump it suffered in 2008 – 2009 following the financial crisis due to sub-prime and later percolated to prime lending partly as a fall out of significant rise in interest rates. While commencing the quantitative easing, the central bank indicated that it will follow the easy money policy as long as the economy needed it.
However, after his remarks on June 19 there was a knee-jerk reaction across the globe and the major institutions starting taking back money from the emerging markets to put back in the U.S. bond market where the yield is expected to increase once the Fed reduces bond buying program. The commodity markets too reacted unfavorably with gold and oil recording losses.
Sensing market volatility, the U.S. Fed chairman came out with another comment a few days later suggesting that unless the job market improves to a comfort zone, it was ready to keep the easy money policy. This has led to various markets, including stock and commodity, to react positively.
Now he has commented that the central bank will start reducing the bond buying program and at the same time assured Congress that it will not close the options but keep it open. However, the undercurrent message seems to remain the same, the Fed wants the economy to stand on its own quickly without the support of the central bank since it had bought back bonds worth over $3 trillion. At the same time, it is not averse to retaining the quantitative easing to help economy gain strength to stand on its own.