Bernanke's market test came at the right time
Federal Reserve chairman Ben Bernanke spooked markets last week with his comments about slowing money-printing, but he was right to make them
Japans commitment to pumping cash and the European Central Banks untested but believed promise to "do whatever it takes" gave Bernanke the perfect opportunity to see how markets might react to a hint of the beginning of the end of US quantitative easing.
The problem is simple. Central bank stimulus is about the only thing keeping securities markets ticking over and arent they just! But like all medication, no matter how large the dose, eventually it wears off.
And there has been little public discussion about how to wean investors off central bank cash.
The initial reaction to Bernankes words was quite scary, but by Thursday the US was already shrugging off the gloom and did not feel the need to emulate Asia and Europes 2% and deeper stockmarket falls.
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Central bankers everywhere will be relieved. Those falls probably had plenty to do with poor Chinese data as much as the fear of having to go through QE cold turkey.
If the recent crises have taught us anything about investor behavior, it is that bad news never causes as much angst the second time.
Investors quickly become inured to signals of doom another reason why Bernankes shot across the bows may prove useful later.
It is true that much of what seems like investor confidence in the face of economic peril (see southern European sovereign bond markets) is really them having more QE cash than they know what to do with. It is also true that there is no real end to QE in sight. Growth and inflation are far from rampant.
But even if QEs end is a way off, it was wise to gauge what the response might be when Dr Fed starts cutting the markets dose.
- This article first appeared on Euroweek.com.
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