The Fed is ready to move forward
Chairman Ben Bernanke indicated last week that the third round of quantitative easing will likely slow down this year and may end in 2014 if the unemployment rate falls below 7.0%. The jump in Treasury yields seems to anticipate an initial move in September, although December is the current choice. The decision to keep the monetary policy unchanged for now was not unanimous. There are concerns that inflation will rise from the ashes and challenge global growth. Nevertheless, Mr. Bernanke is optimistic about growth and expects unemployment to continue to shrink. It is clear that the Federal Reserve wants to move out of the current monetary policy as soon as possible, but financial markets are afraid of another recession. In the past 100 years, the economy has experienced recessionary periods every four to five years. The last decline happened in 2008.
Markets are correcting
In response to the Fed’s announcement, gold fell to its lowest level in three years, while the S&P 500 index lost about 40 points on Thursday. The S&P 500 index could decline to 1550 in the short term and 1350-1450 in the medium term. There are still some concerns about global growth. In China, for example, liquidity is shrinking. The latest bond issue was not fulfilled completely. As a result, the interbank rate rose from almost 3% in May to 11% last week, which will put smaller banks under pressure. In Europe, the Greek government is again on the brink of collapse after the Democratic Left party left the coalition. The good news is that Spain and Portugal are recovering from recession and can expect to see improvements by 2014.
The Fed made it clear that rates will stay low for a meaningful period after the asset purchase program terminates. In addition, with such low prices, the real estate business will continue to bottom out even as the mortgage rate rises. Despite setbacks, the U.S. markets are moving out of the recession that started in 2000. In time, faith will be restored, and stocks will begin a new expansionary cycle that could last twenty years.
Angelo Airaghi, www.ProfitsOn.com
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