How the Fed Changed the Rules Yesterday
Yesterday's statement from the Federal Open Market Committee and the follow-up press conference by Fed Chairman Ben Bernanke sparked a downdraft in U.S. shares. That spread to Asia overnight, and the largest regional stock market, Japan's Nikkei 225, lost 1.7% today. Hong Kong, which operates a monetary policy that is intimately tied to the Fed's due to the Hong Kong dollar-U.S. dollar peg, saw its main index lose nearly 3%.
In fairness, not all of these losses are attributable to Dr. Ben and his Fed. The HSBC-Markit flash purchasing managers' index came in at 48.3, below the forecast of 49.1, indicating that Chinese manufacturing contracted further in June.
Europe has not been spared, either: The U.K.'s FTSE 100, Germany's DAX, and France's CAC 40 had all dropped more than 2% as of 9:50 a.m. EDT. Finally, as we come full circle around the globe, reverberations from the Fed appear to continue to impact the U.S. market today, as the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average are down 1.12% and 1.16%, respectively, at 10:05 a.m. EDT.
What's all the fuss about?
As I explained yesterday, yesterday's policy meeting looks like an important milestone in the post-crisis recovery, as the Fed signaled that the days of easy money are now numbered. Based on its current outlook for the economy, the FOMC now expects the Fed to begin reducing its bond-buying this year, with purchases to taper off to zero sometime next year (a 7% unemployment rate is one of the thresholds the central bank will be looking for).
Bernanke was careful to emphasize (multiple times) that the actual calendar for halting quantitative easing is entirely dependent on the future performance of the economy, but he laid out guidelines based on the Fed's current assessment of U.S. economic prospects.
This year's rally, which ran through mid-May, looked overdone to me, based solely on the fundamentals:
The strength and consistency of those gains smacked of a bet on continuing central-bank largesse. With the Fed's easy-money promise no longer open-ended, some of the air is being let out of share prices -- a healthy outcome. Welcome back to the table, value-conscious stock-pickers: The game is changing as fundamentals begin to reassert themselves.
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The article How the Fed Changed the Rules Yesterday originally appeared on Fool.com.Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him on LinkedIn. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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