The value of the dollar has fallen in global currency markets, following speculation over the future of the Federal Reserve’s policy of economic stimulus. Investors have taken fright in recent days over concern that Fed chairman Ben Bernanke may be preparing to switch off the Fed’s funding supply to US bonds, which could spell uncertain times for the recovery of the wider economy.
Last week Bernanke hinted at the strong possibility the Federal Reserve was looking to take a step back from quantitative easing. The Fed currently spends $85 billion a month on its stimulus program, with Bernanke’s expectation that the economy will soon be in a sufficiently strong position to stand more independently.
However, he was quick to clarify that the position could only change when economic conditions were right for the US. The stimulus package has been used to help usher in the economic recovery in the US, keeping interest rates low and allowing for more suitable conditions for growth.
With withdrawal now on the table for the quantitative easing program, and the threat of rising interest rates as a result, markets are becoming increasingly nervous about what the future might hold for the US recovery. As banks and economies worldwide continue to move through the difficulties caused by the global crisis, there remain fears that the economy is not yet able to survive on its own.
The news of future changes to the stimulus policy has affected markets across the globe, including markets for gold and shares as fears over a withdrawal of support resonate worldwide. The reaction in the markets led to Bernanke downplaying speculation, and clarifying that action would only be taken where there was supporting economic data to justify the decision.
The Federal Reserve has been injecting money into US bonds since 2008, in a bid to prop up the ailing US economy. The suggestion that bond-buying could culminate at some stage in 2014 was met with the suggestions interest rates too might start to increase from their current record lows.
Forbes’s commentator Agustino Fontevecchia suggested that the Fed could seek to roll back on its stimulus policy over the next six months or so, as underlying conditions get to a sufficiently robust stage to require less central bank support.
“Bernanke delivered the show most Fed watchers expected, and came out guns blazing after the FOMC statement revealed ‘diminished’ downside risks to the economy. If things work out as expected over the next six to twelve months, the Fed will begin to draw-down its asset purchases, currently running at a pace of $85 billion a month, and end them at some point next year, when the unemployment rate hits 7%.”
Investment advisors in Menlo Park and across the US are mostly expecting that conditions in the US could take months to hit the Fed’s triggers. Yet despite the longer timeframe experts are positing for those changes to take place, markets are already showing themselves to be concerned about the lack of fresh liquidity support being pumped into the system.