Thursday, 23 May 2013

Bernanke wary of premature tightening, stocks fall anyway

Federal Reserve Chairman Ben Bernanke gave no clear indication of when tightening of monetary policy is likely to begin in his testimony to the US Congress on Wednesday. From Reuters:

The Federal Reserve's monetary stimulus is helping the economy recover but the central bank needs to see further signs of traction before taking its foot off the gas pedal, Fed Chairman Ben Bernanke said on Wednesday...

"If we see continued improvement and we have confidence that that's going to be sustained then we could in the next few meetings ... take a step down in our pace of purchases," he said...

"A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further," Bernanke said.

The lack of assurance of continued monetary easing, however, was enough to send US stocks down on Wednesday. The S&P 500 fell 0.8 percent, pulling back from the record high the previous day.

Ten-year Treasury yields rose 11 basis points to 2.04 percent, topping 2 percent for the first time since March, and the US dollar rose 0.5 percent to near its strongest level since 2010.

A sustained recovery in the housing market will probably increase the probability of tightening. The National Association of Realtors reported on Wednesday that existing home sales rose 0.6 percent in April to an annual rate of 4.97 million units, the highest since November 2009. The inventory of homes on the market rose 11.9 percent but remains at just 5.2 months' worth of sales.

Elsewhere, there were mixed economic data from the UK on Wednesday. Retail sales fell 1.3 percent in April but factory orders improved in May, with the Confederation of British Industry's total order book balance improving to -20 this month from -25 in April.

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