By Walter Kurtz, Sober Look
The last time we discussed the Credit Suisse Global Risk Appetite Index, it was headed for “euphoria” (see this post from May 21). Around May 22 something changed, and it was all downhill from there (see figure 1 below).
It was Bernanke’s first hawkish statement.
May 22; Bernanke: – We’re trying to make an assessment of whether or not we have seen real and sustainable progress in the labor market outlook. If we see continued improvement and we have confidence that that is going to be sustained, then we could in — in the next few meetings — we could take a step down in our pace of purchases.
Intentionally or not, the Chairman burst the market bubble just before it hit “euphoria”. It was clear that the Fed was becoming concerned about froth forming in fixed income markets (Bernanke spoke about it – see this post). It was time to end it.
The unfortunate outcome of this action however is that it remains unclear whether the economy would have been better off if QE3 was never launched at all. The next 12 months will be filled with uncertainties about the exit timing, rising rates, and shaky credit markets. Anecdotal evidence suggests that some banks are becoming jittery about growing their balance sheets in this environment. As a result, loan growth is already slowing. That can’t be good for business growth and hiring. When the dust settles, the economy may end up being in worse shape than it would have been if the Fed left it alone in August of 2012.
Latest posts by Sober Look (see all)
Did you have a comment or question about this post, finance, economics or your love life? Feel free to use the discussion forum here to continue the discussion.*
*We take no responsibility for bad relationship advice.