Risk Management, Trading & Portfolio Strategies

Federal Reserve press conference leads to surging market instability, risk factors

Global markets have reacted poorly to further indications that the so-called “tapering” could occur later this year or in early 2014.

Federal Reserve Chairman Ben Bernanke has been cautiously hinting for the past several weeks that the central bank will slowly – but surely – unwind its various monetary stimulus programs, known officially as quantitative easing (QE). These asset purchasing initiatives – begun in response to the fallout from the 2007-2009 financial panic – have resulted in huge gains for global stock markets, as well as a big reduction in interest rates, yet some remain wary or downright concerned about how the Fed plans to withdraw itself from its current position.

These anxieties came to a head on June 19, when the Federal Open Market Committee (FOMC) concluded its two-day conference with a press gathering hosted by Bernanke himself. The meeting with the press is unique to Bernanke's tenure, and has served to offer a greater level of transparency compared to previous Fed chairmen. Bernanke stressed that "any slowing in the pace of purchases will be akin to letting up a bit on the gas pedal as the car picks up speed, not beginning to apply the brakes."

According to Forbes, he went on to say that nothing is set in stone and that the central bank could continue with its $85 billion-per-month purchases if the economic recovery begins to sputter. If the so-called "tapering" does occur, it could begin later this year or in early 2014. 

The reaction to Bernanke's conference was mostly negative. Global markets, which have not fully priced in the "taper," sold off at an alarming rate. The world's major exchanges shed between 1 and 4 percent of their value within hours of the press conference, and these losses were extended into June 20.

Investors should tread carefully in the coming days as market participants fully absorb the implications of the latest FOMC minutes, which describe a group of governors and branch presidents divided over the course of the latest iteration of QE. This means following signs of volatility and reacting accordingly.

Those who want a technological edge as they navigate volatile global markets should consider using SmartStops to help them hedge and adjust if conditions worsen. For example, SmartStops' Risk Signals portfolio management tool can help investors spot indications of surging risk before they become a problem.

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