Stock markets worldwide have extended their losses on investors’ concerns that the US Federal Reserve is about to begin winding down its US$85bn a month bond-buying programme on signs that the US economy is continuing to improve.
The Fed’s chairman, Ben Bernanke, indicated that the central bank could begin easing up on the programme later this year and it could be discontinued as early as mid-2014. The scenario is made more likely by more optimistic forecasts for the US economy, including a projection that the country’s unemployment rate – which in May stood at 7.6% – will have fallen to between 6.5% and 6.8% by the end of next year.
However, for the time being the Fed’s economic stimulus will be maintained in full and it will continue to buy US$85bn a month in Treasuries and mortgage-backed securities (MBS) until there is actual evidence of the anticipated improvement in the jobs market. The purchases hold down long-term interest rates and have fuelled a steady recovery in the US housing market as well as pushing Wall Street to record high levels until the most recent reversal.
The Fed has attempted to reassure investors that while it may be moving closer to ending its bond-buying programme, the process is likely to be gradual and will not be based on specific triggers. However, stock market declines have been accompanied by a sharp fall in commodity prices led by gold and silver. The US dollar (USD) rose against other currencies, with the Australian dollar (AUD) hitting its lowest level since September 2010 and the Indian rupee (INR) hitting an all-time low.
“What the Fed’s action did was to confirm that unless things in the US get worse then the music is going to be turned down at the party and the dancing is about to end,” commented Paul Lambert, head of currency at London-based Insight Investment. “This adjustment is likely to be a volatile one.”
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