All excited about what Bernanke didn’t say
By CONRAD TAN
REPORTER
IF NOTHING else, this week should be more exciting than the last for investors, punters and armchair doomsday prophets alike.
Mr Bernanke: Didn’t really say anything that could be seen as an increased readiness by the Fed to lower its key federal funds rate target
Various observers and analysts read different meanings into US Federal Reserve chairman Ben Bernanke’s much-awaited speech last Friday, paying as much attention to what he didn’t say as to what he actually said.
Those who want the Fed to cut its main policy interest rate target later this month were happy he said nothing to dampen their hopes; those who think such a move would be premature and risky were happy he made no hint that it would do so.
Without any major bad news to distract investors from hearing what they wanted, shares in both Europe and the US ended solidly higher on Friday, which means shares here and elsewhere in Asia will probably enjoy a good start today.
But apart from making it abundantly clear that the US central bank is closely watching financial market developments and reassuring every one that it will act if problems in the US housing market get worse, Mr Bernanke really said nothing that could be seen as an increased readiness by the Fed to lower its key federal funds rate target at the next policy meeting on Sept 18.
The reluctance by the Fed to commit to any further action - or inaction - is all too easy to understand.
Already, its efforts in August - injecting large amounts of money into the banking system to keep borrowing costs stable, then lowering the interest rate it charges commercial banks who need to borrow directly from the Fed, rather than their peers - have fuelled expectations that it will cut its main Fed funds rate target by at least a quarter of a percentage point, from 5.25 per cent now.
These expectations appear to be hardening into near-conviction among some investors in the US and elsewhere, which spells further turbulence for financial markets and a strong negative reaction if the Fed does decide against lowering the rate in two weeks’ time.
The Fed probably doesn’t want to cut interest rates at all, since that would put its anti-inflationary goals at risk, but it may not be able to avoid doing so.
Meanwhile, investors will have to content themselves with trying to second-guess the Fed’s decision by gleaning clues from economic data releases in the US this week.
Any suggestion that consumer spending there is slowing sharply would make it more acceptable for the Fed to cut interest rates - since it would then be seen as acting to prevent an economic recession, rather than merely trying to please unhappy investors who have lost money in stocks.
There will be plenty of data to keep the speculation on the health of the US economy buzzing, including sales figures from retailers and car makers for August. This Friday, a government report on employment numbers in the US is also likely to heavily influence the broad movements of share prices in the US and Europe that day, and major Asian markets early next week.
For those who very much want to believe that last week’s relative calm in the local stock market and elsewhere in Asia is a sign of financial markets returning to normal, there are a few glaring signs that things are anything but.
On Friday, yields on short-term US Treasury bills - seen by most investors as the safest instruments to hold in a financial crisis - were still nearly a full percentage point lower than they were at the start of August. This suggests that - apart from strong market expectations of the Fed lowering interest rates - investors are still a lot more cautious and risk averse than they were a month ago.
Another sign that things have changed is the strength of the Japanese yen against the US dollar. At about 116 yen to the dollar on Friday, the yen has appreciated some two-and-a-half per cent over the past month against the dollar, despite coming off a high two weeks ago.
So far, the damage to blue chips here has still been limited. At Friday’s close, 25 of the 48 component stocks on the Straits Times Index were higher over the week, while 19 were lower and four unchanged.
Over the month of August, the index lost 4.4 per cent. Of its 48 members, 39 fell, while just eight were higher and one - United Test & Assembly Center - was unchanged.
Source : Business Times - 03 sept 2007
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