Ending of Q3, What Does Fed Have in Mind? Is Bear Market Coming?
In the last week, the financial markets have gone a bit haywire in response to Ben Bernanke’s statements over the last month concerning the gradual ending of QE3. QE or “quantitative easing” was set up in September of 2012 to ease the financial strain of unemployment and keep interest rates low during the recovery. Since then, the Federal Reserve (FED) has been purchasing $85 billion per month of mortgage-backed bonds and treasury bonds.
Bernanke, Chairman of the FED plans to begin a gradual slowing of the FED’s purchasing with the idea to stop it once unemployment is down to 7%. Bernanke has given a rough estimate of when the funding will no longer be necessary to be somewhere around the summer of 2014. In addition, the FED will continue to keep interest rates down until the unemployment numbers stay below 6.5% or inflation exceeds 2%.
It’s difficult to predict what will happen after the initial slowing down of QE3. However, it is certain that these bonds will eventually need to be sold and the interest rates will begin to go up. The FED has advised that it will keep interest rates down while this gradual downshifting of buying bonds takes place, while simultaneously keeping a watchful eye on unemployment and job growth. The initial impact of interest rates will not be affected in the short-term, but you will see long-term rates increase.
So, are we in for a bear market in the near future? Regardless of the overall economicsituation, you can always depend on trigger-happy speculators reacting at every flinch in Bernanke’s brow, of course. In truth, it all depends on how well the shifting of the FED’s gears ease over the unemployment and inflation numbers. Just last month, the unemployment rate was reported as 7.5%, so it’s possible we may be seeing these changes sooner than later. We most likely won’t be seeing short-term interest rates going up for quite some time, making it a great market to purchase a home. Most likely, the market will go down as the initial changes take effect and then settle again.
Maxime Rieman is a writer for NerdWallet, a financial literacy site that specializes in subjects ranging from market strategies to auto insurance comparisons.
1. purchasing $85 billion per month – http://www.reuters.com/article/2013/06/08/us-usa-fed-poll-idUSBRE95701G20130608
2. gradual slowing of the FED’s purchasing – http://money.cnn.com/2013/06/24/news/economy/federal-reserve-qe3/index.html
3. unemployment numbers stay below 6.5% – http://www.ft.com/intl/cms/s/0/17078b02-d905-11e2-84fa-00144feab7de.html#axzz2Y1jlBpI1
4. inflation exceeds 2% – http://beta.fool.com/adamlevy/2013/05/25/the-ups-and-downs-of-the-end-of-qe3/35200/
5. initial impact of interest rates – http://beta.fool.com/adamlevy/2013/05/25/the-ups-and-downs-of-the-end-of-qe3/35200/