Well, the Fed “giveth” less than some had hoped for, but it also “giveth” a roughly two-month reprieve to the dollar-carry/commodity-betting crowd. The parade on “Easy Street” thus continues amid noisy revelry. Whilst stressing that markets can probably say “farewell” to the idea of any QE3 being loaded into the Fed’s missile silos, Mr. Bernanke let it be known that, at least he, is comfortable with current policy and that QE2 will live until it expires in some 60 days. The catalyst for the lack of an offer of a QE3 program was, in fact, the current “it’s getting hotter in here” reading of the inflation thermometer in the US.
Thus, to say that the Fed is not “aware” of the threats being posed by some of the very policies it has put into motion in recent years would be to ignore what Mr. Bernanke said and meant when he referred to the Fed “having to respond” in the event “inflation persists or inflation expectations begin to move [higher].” Implicit in the language that he used in front of the microphones on Wednesday was Mr. Bernanke’s take that the decline in the US dollar has been on the “orderly” side and that there is as yet no real need to change course when in fact such a decline has helped support gains not only in the economy but in equity markets. Market pundits described this as a de facto acknowledgement by the Fed chief of the pivotal role being played by the stock market in the grand scheme of things economic.
Mr. Bernanke also attempted to allay fears that the cessation of his institution’s bond-buying program will have much of a material impact on financial markets, when the end of June rolls around. Consensus among economists is that the Fed will begin to reverse its stimulus campaign, but not for at least a few months from now. The focus regarding any announcement of an exit from accommodation has actually shifted to the FOMC meetings slated to take place in August and September, at this point. The only thing absent from the press conference’s contents was any indication of exactly how and when the blow-up in oil prices might come to an end or begin to reverse course.
Meanwhile, other central banks around the world continue to be headed in a different direction of that which the Fed remains in, in part due precisely to the Fed’s “steady as she goes” posturing. Importing inflation continues not to sit well with Chinese officials, for example. While most equity markets initially gained following the parsing of the FOMC announcement, the regional ones in Asia began to lose value in the wake of fears that the PBOC could (read: will) tighten some more, and do so, soon. Grantham Mayo Van Otterloo & Co. CIO Jeremy Grantham is of the opinion that Chinese economic growth could slow to a level considerably less than the 9.7% pace it exhibited in Q1 of 2011.
Bloomberg notes that “Mr. Grantham, 72, is best known for his bearish outlook and for spotting asset bubbles early. He correctly forecast in 2000 that U.S. stocks would decline in the coming decade, and as early as July 2007 predicted that a large global bank would go bust amid credit market declines.” Mr. Grantham, whose views we quoted yesterday on the subject of the paradigm presently manifest in commodities, is ascribing a 25% chance to the prospect that the world’s second largest economy might “stumble” before next year is over, mainly on account of an overcooked real estate niche and as a result of larger-than-large capital spending.