Markets Tumble After Fed Chair Bernanke Predicts the End of Quantitative Easing

By:  Thomas R. Eddlem
06/24/2013
       
Markets Tumble After Fed Chair Bernanke Predicts the End of Quantitative Easing

Stock and commodities markets went into a two-day slide after Federal Reserve Chairman Ben Bernanke hinted that the United States would end so-called “quantitative easing” sometime during 2014. 

Stock and commodities markets went into a two-day slide after Federal Reserve Chairman Ben Bernanke hinted that the United States would end so-called “quantitative easing” sometime during 2014. "Quantitative easing" is the term used by Federal Reserve Bank officials for the inflationary creation of money to finance U.S. government debt and purchase mortgage-backed securities from banks on the open market.

The June 21 trading day ended slightly up, with the Dow Jones Industrial Average up 41.08 to 14,799.40, after losing more than 500 points in the previous two days. Gold dipped below the $1,300 per ounce threshold, the lowest price in more than two years, and other precious metals and oil also fell over the same period.

In the release about the Federal Reserve Bank's Open Market Committee meeting, Fed officials predicted three percent GDP growth in the U.S. economy next year, low inflation, and a reduction of the unemployment level to six percent by the end of 2015. The prediction may have been too rosy, considering the extraordinarily low savings rates of consumers, high national debt, and recent economic history. In the past 20 years, the U.S. economy has only seen CPI-adjusted growth exceeding three percent of GDP in years before an economic crash. The U.S. economy saw two three-percent growth years in 2004-05 (before the housing/banking bubble burst), and four years of four-percent growth from 1997-2000 (before the dot-com bubble burst). 

Regarding “quantitative easing,” the Fed explained that “the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.” The Federal Reserve release also announced almost unanimous plans to continue the Fed's policy of a near-zero discount loan rate for banks through the end of 2014. Members of the Federal Reserve's Open Market Committee split on what the policy should be in 2015:

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