In January next year, Ben Bernanke’s term as chair of the Federal Reserve Board will end. Janet Yellen has been nominated to replace him, and her confirmation appears to be a certainty. Investors are wondering if the Fed’s accommodative monetary policy will continue and from the look of things it should. Yellen has long been a supporter of the Fed’s practice of quantitative easing, known as QE.
Quantitative easing consists of buying bonds and mortgage-backed securities from the marketplace and holding them on the Fed’s balance sheet. We are currently on our third round of QE. The first two rounds had specific termination dates. This round does not have an end date and could go on indefinitely.
Right now the Fed is buying $85 billion per month in bonds, and a lot of that money finds its way into the stock market. Talks of tapering the QE program have resulted in stock market sell offs.
This round of QE does not have a termination date, so the decision to discontinue the policy will depend on the economy. The Fed is looking for the unemployment rate to get down below 6.5 percent, wants to see inflation running at about 2 percent and wants to see GDP growth.
Bernanke has reminded us several times that the economic numbers they’re looking at are not triggers, they are thresholds. In other words, there won’t be an automatic decision made to taper the easing if the unemployment rate drops below 6.5 percent, but they’ll consider that in addition to other economic factors.
Some people are saying that the stock market is running on QE and that the Fed can’t stop the program without hurting the market, that in fact we have become addicted to QE. QE is has certainly been a factor behind the stock market’s strong performance recently, but it is not the only force driving the markets.
So, the question many investors are asking is whether or not the change of leadership at the Fed will have adverse impact on stocks — the short answer is that under Yellen’s leadership, we’re likely to see a continuation of Bernanke’s policies of an accommodative monetary policy.
In recent testimony to Congress, Bernanke said that he thought the Fed was doing all it could for the economy in terms of monetary policy, but now it was up to Congress to address the nation’s fiscal issues. Given Congress’ record of getting things done lately, there really shouldn’t be anything to worry about.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information on his money management service can be found at his blog at www.sellacalloption.com or by calling 775-657-8065. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.