The Federal Reserve Chairman spoke about triggers and thresholds, but did not mention the punch bowl. Regardless, the speech was abundantly clear for those who listened intently, although the Dow heading downwards indicates the markets were not cheered although the picture is quite optimistic.
But then again, market participants tend to be greedy, and expect huge gains overnight if not instantly. I expect the market will pick up after the retail investors and mutual funds have digested and acted on the news.
There is the sign of stability in the economy going forwards. Interest rate at a quarter percent is at a record low, and unlikely to be cut further. So the low interest rate is going to hold into 2014.
If the unemployment rate were to go down towards 6.5 percent from the current 7.6 percent, then that would be the threshold (but not a trigger) for considering increase of the interest rate. So rates wouldn't be going up any time soon, although in the last few weeks some companies in unfounded anticipation have put up their interest rates. Depending on market dynamics, those are likely to be corrected (downwards) in due course.
Monetary policy will continue to support Recovery, stated Mr Bernanke. 200,000 jobs per month have been created on average over the last six months. This has improved the housing market, and is feeding optimism into household spending.
The economy continues to improve at a modest pace, and the policy is geared to return to maximum employment in the context of price stability.
Regarding the QE, through purchase of mortgage backed securities, these would be reduced in measured steps, beginning of 2014. This is the intention but would be reviewed in context of how the economy actually delivers. The brakes are not being applied yet (so should cheer people up for the foreseeable future).
(c) Durudarshan Dadlani, 19th June 2013.