After a June policy-setting meeting, comments made by Chairman of the Federal Reserve Ben Bernanke caused a stir in the financial markets. As it dawned that the Fed was soon likely to curtail a proportion of its stimulus efforts, declines of over 200 points hit the Dow Jones Industrial Average.
Economists, Wall Street, and the media all seek to anticipate upcoming monetary policy shifts. The odds of an expected action can often be “priced in” to market prices, even before announcements are made. Surprises, though, tend to have a more dramatic effect on stocks and bonds.
The Federal Reserve has been using unprecedented measures to reduce the cost of borrowing and stimulate growth for a stuttering U.S. economy. Recent events serve as a reminder that even misinterpretations of Fed communications have the power to spur periods of increased market volatility.
The expected September start for the reduction of stimulus efforts, sometimes referred to as the "taper", has many analysts asserting that we are about to move into another stretch of such turbulence this month. So what should investors watch for?