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Judgement day: the Fed chairman decides fate of US stimulus programme

An anxious waiting game.

New Statesman
Fed Chairman Ben Bernanke. Photograph: Getty Images

The world stock markets are shaky as investors are cautious amid growing concerns that the US Federal Reserve may halt its favourite economic stimulus programme earlier than expected.

The US stocks opened lower this week, after reaching all-time highs last week. Now, financial media and analysts are putting the weak market down to a lack of economic security, after Fed officials suggested that the Federal Reserve might taper its bond buying programs.

Since September, the central bank has printed $85bn a month to purchase Treasuries and mortgage-backed securities, a policy known as quantitative easing. The programme’s life is contingent on the strength of the economy – the Fed is committed to ending it as soon as it detects substantial improvement in the outlook for US employment.

That said, it is no surprise that all eyes are on Fed Chairman Ben Bernanke, who is scheduled to give his testimony on the US economic outlook before Congress on Wednesday. The speech might give some hints about the Fed's exit strategy.

When the Fed’s 19-member policy committee last met three weeks ago, officials emphasised that they could either increase or decrease the scale of their monthly bond purchases, depending on projections for the economy.

In the weeks since, positive news on the US economy has outweighed the negative, thanks to a stronger jobs market, and growth in retail sales.

So it is no surprise that investors across the globe paid attention when Chicago Fed President Charles Evans, a voting member of the Federal Open Market Committee, the policy-setting arm of the Fed, last week expressed optimism over the US economy, raising concerns that he would support tapering the quantitative easing policy earlier than expected.

The US central bank's massive asset purchases are considered the main driver of US economic growth, so with the latest news that the stimulus programme might be halted or at best, that bond buying will decrease, investors are becoming wary. As the US dollar retreated against major currencies Monday, there’s no doubt that today’s testimony will have a serious impact on the American economy as well as global finances.

Consequently, today will be an anxious waiting game.