Bernanke's Bluff, Congress Gridlock, What Happens Next?


Did you fall for it? Market pundits and the general investment community gave the impression that Bernanke would announce the taper plan during September's FOMC meeting. While not an impossible event, the political and economic situation made it a low probability event. Here are my thoughts on why:

  1. Bernanke's term ends January 31, 2014. A replacement has not been named and at the time one of the key front runners, Larry Summers, withdrew from the race. A policy change to the QE program which has been in place almost continuously since 2009 requires a stable Federal Reserve front office. At minimum market participants needed a clear replacement whose platform they can understand and factor into their investment thesis.
  2. As we can see now, the federal government has fallen into partisan bullshit. Whichever "side" you're on is irrelevant but as a market participant the government shutdown has created uncertainty. At the time Bernanke and the Fed clearly saw the possibility of a government shutdown as a likely destabilizing force in the marketplace.  Uncertainty creates volatility and Bernanke has sought to avoid increasing volatility at all costs.

Not too complicated is it? The Federal Reserve hates volatility. These two forces are the most likely to add to the increase in volatility once the taper is announced. Therefore it is my opinion that any taper announcements with dates and clear reduction amounts will not be declared until the two aformentioned situations are resolved.

In short I expect no taper until a new chairman is named, and the partisan nonsense is resolved/delayed for another year.

As for what happens next, until the government shutdown has concluded expect more volatility. I am still investing/trading with a long bias. As long as the flow of funds from the Federal Reserve continues at the current pace, and economic data continues to show improvement declines in the broad market present opportunities to buy your favorite stock at a discount.