Stock markets across the globe leapt to life following the news. The three main US stock indexes soared to record highs. Closer to home, London’s FTSE rose 1.23%, Paris’s Cac jumped 1.32% and Frankfurt’s Dax shot up by 1.15%. Further afield Japan’s Nikkei 225 rose 1.5%, Hong Kong’s Hang Seng jumped nearly 2% and Australia’s ASX 200 leapt 1.2%.
The decision followed months of speculation and market uncertainty, in which many investors predicted the Federal Reserve would begin reducing its bond-buying plan.
Those close to the Reserve have been hinting at a slowdown in bond-buying all year. Back in June, economist and president of the Dallas Central Reserve Richard Fisher insisted the Fed (as it's affectionately known) wouldn’t back down to ‘feral hogs’ in the market, baying for more cheap money.
Now it appears the ‘hogs’ still hold sway after all.
‘The committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases,’ said the Fed in a statement.
It said there was no fixed timetable for the tapering and pointed at the unemployment rate and ever-present concerns about economic recovery as the reason behind its cautious decision.
Asian markets look set to benefit highly from Bernanke’s caution. The hints about a tapering of Federal QE have had a disastrous effect on Asian financial markets over the past few months. The program of bond buying had pumped lots of extra money in Asian markets because of the high returns offered. However, the concerns over tapering had caused investors to move their money out of these countries into other assets – depreciating the Indian rupee and Indonesian rupiah significantly.
But good news for the markets, could spell bad news for the US and global economies, if the majority commentators are to be believed. While QE pumps money into the economy, the resulting spikes in GDP are seen as unsustainable. The spurious nature of the QE inspired growth could lead to another set of economic bubbles, ripe for bursting. The rise in stock prices, is not coming from free market activity, as it should - which could have long-term effects on the capital structure of the economy.
In a press conference, Bernanke suggested the Fed might start tightening the QE taps come the Reserve’s December meeting (which could turn out to be his swansong shortly before he steps down in January).
It’s been a hectic week for the Fed. Its vice chair, Janet Yellen, became the frontrunner in the race to become the next chairperson. Economist Larry Summers, widely reported to be Barack Obama’s favourite to take the spot, bowed out of the running, sending stocks soaring.
The jury is out on whether it will be up to the new chairperson to wean the US off its dependence on ‘bond-buying’ or if Bernanke will step up to defy the markets, in one last hurrah. Whatever happens though, the path of Bernanke’s successor has been well and truly paved by him. With tapering, it’s not a case of ‘if?’ But ‘when?’