You don’t have to watch the morning financial news or read the newspapers for long before realising that the day’s market activities will once again be driven by a “will they or won’t they” debate over the US Federal Reserve. Nearly every day begins and ends with extensive debate on the same questions: What will the Fed do next? Will there be another round of quantitative easing?
This week is yet another example, with global equity and bond markets now not debating macroeconomic fundamentals but instead placing bets on what Ben Bernanke will or won’t say in Jackson Hole on Friday. We are getting to the point where this question, and Mr Bernanke’s Fed itself, are becoming unhealthy distractions from improving our free market system and engaging in fundamental policy debates.
Close Fed-watching by the markets is to be expected on days around policy announcements by the Federal Open Market Committee. And it is a sign of a healthy market when there are movements in bond prices in response to new pieces of economic data, such as unemployment figures or gross domestic product. There is of course nothing unusual about investors adjusting their expectations of interest rates as new information becomes available. But we are faced with a troubling dynamic where bad economic news is good for stocks because it means more cheap money is on the way and good economic news is bad for stocks because it means less money will be printed.