Phew. The sun is shining. The markets are soaring. And the Fed has not tapered its bond buying. How could it? Unemployment is still high, inflation is low, dissatisfied workers are leaving the labor force, and there is overcapacity in the system. The “tightening of financial conditions” with a high mortgage interest rate and a steep upsurge in long-term bond yields has not made Bernanke feel secure enough to curtail its asset purchases. To say nothing of what the Fed chief referred to as “federal fiscal policy” —a policy where the Congress and the President swing at each other and the country faces bout after bout of never-ending crises. There is threat of a government shutdown on September 30 at the budget meeting and yet another looming fiscal impasse in mid-Oct when the US hits the limit of its debt ceiling. The Fed cannot renounce its stimulus till House Republicans can resist trying to instigate a financial Armageddon simply to cut the money strings for Obamacare. Using a government shutdown or a national debt default as leverage is simply inexcusable.
The very thought of successfully avoiding a potential crisis has made the markets cheer lustily. Following the initial euphoria as the indexes moved beyond their all-time highs on Wednesday, even the Dow Jones and the S&P decided to take a breather yesterday. The S&P 500 was down 0.18% and ended at 1,722.34, while the Dow was down 0.26% and closed the day at 15,636.55. As technology shares showed a sign of resilience due to the strong economic releases, the NASDAQ bucked the trend by ending up higher by 0.15%, finishing the day at 3,789.38. The markets needed to settle down.
Okay, so let’s relax — at least until the debt ceiling crisis puts the entire US credibility at risk.