Interview: Markets have overreacted to Fed's QE exit plan: expert
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E-mail Xinhua, June 22, 2013
Markets reaction to U.S. Federal Reserve's plan to unwind its massive bond-buying program may prove excessive, and the central bank will not rush to an end of its monetary stimulus, said an economist at a Washington-based think tank on Friday.
"The markets have likely overreacted to the remarks made by chairman Bernanke at his press conference on Wednesday," David Stockton, a senior fellow at the Peterson Institute for International Economics, told Xinhua in a interview.
"After all, the chairman indicated that the Fed was likely to continue its program of purchases, and thus continue its easing of monetary policy, until the middle of next year," he said.
The former Fed chief economist pointed out that market volatility almost always spikes when a change in direction in monetary policy comes into closer view, and "this time will be no exception."
However, in his view, there are some legitimate reasons for market participants to be concerned about Fed policy, as it has been consistently too optimistic about the economic outlook in recent years and the acceleration in economic activity that they are projecting is "far from assured."
"Heightened market volatility is likely to stay for a while," Stockton said, adding that markets are going to be "hypersensitive " to shifts in the incoming economic data and to any comments made by Fed officials.
"If the economy strengthens as the Fed anticipates, the economic recovery should be able to withstand the increased volatility," Stockton said.
U.S. financial market has been in flux since Fed chairman Bernanke told the Congress on May 22 that the central bank would dial back the quantitative easing in one of its next few meetings. The possible timetable he laid out earlier this week further rattled the market and sparked a sell-off in stocks and other risky assets around the globe.
Over the past several years, the Fed has launched three rounds of asset purchase program, known as QEs, injecting about 2.7 trillion dollars into the financial system. Such non-conventional measure is meant to push down longer-term interest rates and spur the economic growth in the context of near zero short-term interest rates.
In order to prepare the market for a change in policy, Bernanke detailed the plan Wednesday that the Fed would pare its current 85- billion-dollar monthly bond purchase program later this year, before phasing it out by the middle of next year, if the economy unfolds as the Fed expects. Investors worried that the underpinnings of the growth will fade as the era of easy money comes to an end. Fears drove down the stock market and pushed interest rates up.
"Clearly, an end to the Fed's QE policies will weigh on many risky asset classes, emerging markets included," said Stockton. " Shifting capital flows are likely to present challenges to some emerging economies. But those economies with fundamentally sound macroeconomic conditions and well managed policies should come through this period of financial turbulence in reasonably good condition."
"The best approach for policymakers in these economies would be to focus on the long-term fundamentals and not react to short-term swings in financial markets," he noted.
Stockton also believed that the Fed is unlikely to rush its conclusion of asset purchases. He said he would expect the first taper to occur in September by only 15 billion dollars to 20 billion dollars, provided employment growth over the summer runs at around 175,000 to 200,000 per month.
If employment growth averages 150,000 or less, the Fed's policy- setting Federal Open Market Committee is likely to push back the first trimming until December, he said. "Continued very low inflation reading might also cause them to delay their first taper, but the labor market readings will be foremost in their policy considerations." Endi
