Traders today are awaiting an update on the course of the Federal Reserve’s stimulative monetary policy when Fed Chairman Ben Bernanke testifies before Congress. In addition, traders will be looking for policy clues from the release of the minutes on Wednesday of the Fed’s last policy meeting. Constant monetary stimulus from the world’s major central banks, including the Federal Reserve, has been the key factor behind the stock market’s rise to multi-year highs.
That is why traders feel that any indication that the Fed is thinking about cutting back on the stimulus may be a warning flag for the markets. In recent weeks, some Federal Reserve officials have openly talked about scaling back support for the U.S. economy and the financial markets now that both seem to be on firmer footing.
Even the usually dovish Federal Reserve Bank of Chicago president and CEO, Charles Evans, is thinking about cutting back the stimulus. Reuters reported that on Monday he said that, while the pick-up in the U.S. job market continued, he was “open-minded” about slowing the Federal Reserve’s $85 billion a month bond buying program, and mentioned the idea of actually halting it.
Most traders and economists expect Bernanke to deliver a message of “steady as she goes” monetary policy when he testifies before Congress. Any hint that he and the members of the Federal Reserve Board are seriously considering ending the bond buying program would certainly roil the markets. However, that is unlikely at this time since the unemployment and other economic indicators have yet to reach the Fed’s target levels.
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