Continuity likely at the Fed - for now
WALL Street last week rose to three consecutive all-time highs in response to clear signals from incoming US Federal Reserve chair Janet Yellen that the US$85 billion per month monetary stimulus started by outgoing chairman Ben Bernanke - known as quantitative easing or QE - would continue until the US economy improves.
Equity bulls are, therefore, happy that the liquidity-driven run which has propelled the S&P 500 up 26 per cent this year will continue for the rest of the year. And, to be sure, there are good reasons to expect Ms Yellen to persevere with Mr Bernanke's strategy of buying housing-market bonds in order to lower long-term interest rates, while simultaneously keeping short-term rates close to zero in a twin-pronged approach to stimulate growth.
This was obvious in her nomination testimony to the Senate banking committee last Thursday, when she said it is imperative that the Fed does what it can to encourage a strong recovery and defended the three rounds of QE that the Fed has implemented since 2008. She pointed out that the Fed is aiding the recovery "by continuing our asset purchase programme, which we put in place with the goal of assuring a substantial improvement in the outlook for the labour market. We are taking into account the costs and the efficacy as we go along. At this point, I think the benefits exceed the costs."
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