The nervous fit that characterises US financial markets today illustrates how addicted they have become to the Federal Reserve’s continuing injection of exceptional liquidity. But however upset financiers are that the Fed may soon “taper” the medication it is administering in the form of asset purchases, this move will only take place because the US economy is strong enough to stand on its own feet. That will be good for its financial markets too. The rest of the world has more cause to worry.
Bond and stock investors both took fright this week. The S&P 500 slid by 1.4 per cent on Thursday; 10-year Treasury bonds ended the week at their highest yield in two years. The trigger was a better than expected jobs report – first-time unemployment benefit claims were the lowest since before the crisis – and an uptick in inflation.
This was another splash of the waves created by Ben Bernanke, the Fed’s chairman, in June. Then, he said the Fed may start slowing the growth of its balance sheet by the end of the year, so long as the economy strengthened as expected. His intention was to stabilise the market by preparing it for the eventual policy change. The result was the opposite. Ever since, traders have been hanging on each data update, sending prices up or down depending on whether it was seen as making “tapering” more or less imminent.