Originally Published July 26th 2010.
On February 25th 2009 the Fed released details of how US banking organizations were to be assessed to ensure that they had sufficient capital to perform on an ongoing basis. The S&P 500 closed that day on 764.9 and, reached a further inter-day low of 666.79 on March 6th 2009. Since then, the S&P 500 had reversed direction, to reach a high of 1219.8 on April 26th 2010.
However by July 1st, the S&P 500 had fallen-back to it’s year to date low of 1010.91. On July 14th the FOMC released minutes of their June meet that included the phrase “the economic outlook had softened somewhat” and on July 21st Bernanke released his “economic outlook remains unusually uncertain” testimony. Could these pronouncements be as significant in allowing a bottom to form as the Fed’s stress test announcement?
Bernanke served as a member of the Fed Board from 2002 and became Chairman on February 1st 2006. He will always be fondly remembered for his November 2002 speech that included both the terms “printing press” and “helicopter drop” in a discussion on how to prevent deflation. In his role of Chairman, he tried to prevent the financial market crisis with upbeat economic assessments, to no avail. He now appears to have learnt that a candid assessment, allows markets to respond to the expected monetary policy changes quicker.
He was certainly complicit in the bubble’s that formed, leading to the financial crisis. He’s certainly THE MAN who knows the necessary policy responses to that financial crisis. Now his communication to market participants has improved. And, in his January 3rd 2010 speech he has even accepted that, monetary (secondarily to regulatory) policy should be used to prevent damaging asset price bubbles. A well rounded Central Banker appears to have developed.
CME 30-day Fed Fund Futures are now indicating that, the FOMC may increase the federal funds rate (from their sub 0.25%) to 0.50% only in Sept 2011. This still gives the S&P 500 plenty of time to recover, till it will have to start discounting the interest rate rise.