Last week Ben Bernanke, Chairman of the Federal Reserve, made an important comment about how much longer he will continue the aggressive bond buying program known as Quantitative Easing. While testifying before the Congressional Joint Economic Committee he said the Fed may start to slow the policy at one of its “next few meetings.” Now forecasters are shortening their prediction of when the policy will change from sometime next year to September – a mere three Fed meetings away.
This news is extremely important, because the Fed’s aggressive policy of keeping interest rates low has been a major component of the stock market’s recent strong performance. Fortunately, we and most other Fed watchers think the Fed will change its policy gradually and will leave itself room to change its mind if economic growth falters. Therefore, we do not see any significant threat to investors at this time. After all, the Fed said it wants to see a 6.5% unemployment rate or a higher inflation rate before it makes a big change in policy. Neither of these events seems likely to occur soon.
The stock and bond market dropped on this news, but only a little bit then recovered quickly. However, this news may be the reason why the stock market had its first down week since mid-April.