Federal Reserve Chairman Ben Bernanke's visits to Congress are often insightful, as the central bank chief frequently rebuffs misconceptions held by lawmakers regarding quantitative easing (QE), monetary policy and the role of the Fed in the wider U.S. market. This week's meeting of the House Committee on Financial Services was no exception, as it featured Bernanke sparring with Republicans and Democrats alike over how effective QE has been since its first iteration nearly four years ago.
Stating that the? stimulus was nowhere near its completion, Bernanke struck an unusually honest note about the health of the economy. He minced no words when he told the committee that it "would tank" were the $85 billion-per-month asset purchases to cease.
He also sought to assuage market concerns, as many investors watched the committee meeting for any signs of the much-feared "tapering" that Bernanke first hinted at during a Federal Open Market Committee (FOMC) press conference earlier this year. He spoke about the FOMC's agreement that further stimulus was preferable to the unknown reaction caused by a lack of QE in the market.
"I emphasize that, because our asset purchases depend on economic and financial developments, they are by no means on a preset course," he stated. "On the one hand, if economic conditions were to improve faster than expected, and inflation appeared to be rising decisively back toward our objective, the pace of asset purchases could be reduced somewhat more quickly. On the other hand, if the outlook for employment were to become relatively less favorable, if inflation did not appear to be moving back toward 2 percent, or if financial conditions – which have tightened recently – were judged to be insufficiently accommodative to allow us to attain our mandated objectives, the current pace of purchases could be maintained for longer."
Investors hoping for a sign of things to come were no doubt left disappointed by the latest comments. Given the difficulty with accurately forecasting risk levels in an investment environment artificially stimulated by QE, individuals may have a hard time ascertaining just how risky their positions are based on quality perception.
SmartStops are a way around this problem. By utilizing real-time market data, these portfolio monitoring tools allow investors to exit a certain position if its performance suggests a negative price trajectory. Our Risk Signals system provides the means to see time-duration details so investors have a better idea of where they are headed in terms of risk development.
Categories: Risk Management, Trading & Portfolio Strategies