Financial markets tumbled after Fed Chairman Ben Bernanke's announcement, but was it an overreaction?

Published: Tuesday, June 25 2013 4:57 p.m. MDT

In this June 19, 2013 file photo, Federal Reserve Chairman Ben Bernanke speaks during a news conference in Washington. A majority of the more than two dozen economists polled in an Associated Press survey late last week agree with the Fed's plan to start slowing its bond purchases later this year if the U.S. economy continues to strengthen. Higher long-term rates will likely result. (AP Photo/Susan Walsh, File)

Susan Walsh, ASSOCIATED PRESS

Last week, Ben Bernanke, the chairman of the Federal Reserve, announced in a press conference that the Fed might taper quantitative easing — the practice of buying $85 billion in U.S. Treasury and mortgage bonds a month — later this year and end it by mid-2014 if unemployment reaches 7 percent and the economy continues to show signs of growth and stability.

Bernanke pointed to indicators like the improvement in the housing market, an increase in consumer confidence and job gains to support the Fed’s view that the economy will continue to grow at a “moderate pace.”

As if to prove his rosy outlook false, the markets tumbled late Wednesday and Thursday in the wake of the press conference. On Thursday, the Dow Jones industrial average and the S&P 500 had their worst day of 2013, interest rates rose, gold prices tumbled 6 percent, and European and Asian markets took a hit as well. Many were quick to critique Bernanke’s timeline for ending bond buying as too rash. Even Larry Kudlow, the small-government conservative who generally opposed quantitative easing, described Bernanke’s move as “a major policy mistake.”

But many analysts have come to Bernanke’s defense, saying the market is overreacting. James Gorman, the CEO of Morgan Stanley, praised the Fed’s move. “Chairman Bernanke, I think, has done a tremendous job and is weening the country off as we're seeing economic recovery," Gorman told CNBC. "That the market would be skittish during this transition, given what we've been through the last five or six years, is not surprising to me."

The editors at Bloomberg expressed a similar opinion, noting that while the market was overreacting, a little anxiety was to be expected. “Monetary policy quite rightly went far out on a limb in the aftermath of the recession, and getting off that limb was never going to be easy,” they wrote.

Stephen Gandel, senior editor at Fortune Magazine, highlighted that quantitative easing only makes up a small portion of the U.S. Treasury's bond market, and that other investors are currently being crowded out by the Fed’s activity. "My anticipation is the that the end of QE will be like going to the dentist," said Bob Eisenbeis of money management firm Cumberland Advisors to Fortune. "The anticipation is worse than that actual visit."

Perhaps signalling an end to the panic, the markets ceased the massive sell-off at the closing bell Friday, as the Dow rose 41.08 for the day.

EMAIL: dmerling@deseretnews.com

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