Headline indices have given back all of the gains seen since the Federal Reserve surprised investors by refusing to reduce its $85 billion bond buying programme on September 18th. The S&P has slid for 3 consecutive days now as market participants continue to search for clues regarding future tapering. There is little doubt that developments at the Federal Reserve are driving the market.
With mixed comments from different Federal Reserve policymakers, traders are desperately seeking for clues as to the timing of tapering. Bank of St. Louis President James Bullard indicated on Friday that an October tapering is on the cards whilst Fed speakers yesterday added to the confusion by saying there probably was not enough data to taper at the next meeting.
Federal Reserve Chairman Ben S. Bernanke cited the danger to the economy from the budget battles as one reason the central bank decided not to pull back on its monetary stimulus. So far, financial markets haven’t been shaken by the prospects of an impasse, with the Standard & Poor’s 500 stock index up 20 percent this year putting U.S. stocks on pace for the best annual gain in four years.
The last time Obama and Congress were at a stalemate over the debt ceiling, in 2011, Standard & Poor’s lowered the government credit rating. Now, Obama is stepping up his rhetoric in urging Congress to pass legislation to avert a debt default or government shutdown, warning in a Sept. 20 speech that Republicans risk creating “profoundly destructive” consequences for the U.S. Obama says he won’t make concessions to Republicans to raise the borrowing limit.