Ben Bernanke’s decision this month to tell the world US interest rates would remain near zero until unemployment fell below 6.5 per cent is possibly the most pivotal comment for sharemarket investors in four years.
It was the first tangible sign the Federal Reserve is beginning to turn its mind to reversing the ultra-accommodative monetary policy that has been in place since the global financial crisis brought the world economy to its knees. It would be negligent for investors to ignore these comments given loose monetary policy has been the jet engine driving share prices in that time. While the fiscal cliff and US debt ceiling will preoccupy our thoughts over the holiday season, monetary policy will rapidly move back to centre stage.
Previously, Bernanke, the Fed chairman, pictured, had stated short-term rates in the US would remain at or near zero for an extended period. This had been interpreted to mean until 2015. In addition Bernanke has implemented money printing exercises in which the Fed is buying $85 billion of government and mortgage backed securities every month. All this has allowed sharemarket investors to operate in a blissful state with no short-term monetary policy shocks on the horizon to derail the near four-year upward charge.
All of a sudden Bernanke’s comments have thrown out the old play book. He knows the biggest challenge the Fed faces since the 2008 financial crisis is how it untangles its unprecedented involvement in markets without causing havoc. With no blueprint it will mainly be guesswork. The Fed has bought trillions of dollars of government securities and put its heavy foot on interest rates.