The markets like QE. You could say that in much the same way as you could say the sun is quite hot – that is to say the sun the star, not the ‘Sun’ the newspaper. But what will happen when QE is finally stopped, even reversed? Yesterday may have seen a dry rehearsal for such a moment, when markets across the world fell sharply, and with the Nikkei 225 losing 7.5 per cent.

But oddly enough, the main catalysts for their fall may have been based on contradictory comments out of the Fed.

Yesterday afternoon the latest Minutes from the FOMC – that’s the Federal Open Market Committee, which is responsible for setting US monetary policy – stated that: “Despite some softness in recent economic data…a number [of FOMC members] expressed willingness to adjust the flow of purchases downward as early as the June meeting.”

Those comments send a shiver of fear down the markets’ spine.

But earlier in the day, Fed Chairman Ben Bernanke spoke to the US congressional Joint Economic Committee. He said: “A long period of low interest rates has costs and risks,” but “a premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further.”

So what was that then? Bernanke warning against relaxing QE too soon! That sent a shiver of excitement down the markets’ spine.

So what happens when shivers collide? Based on yesterday’s findings fear trumps excitement.

Here is your question: if markets tumble as a result of ambiguous words – with some saying QE is coming to an end and some saying it won’t – what will they do when the news is unambiguous, and the Fed puts an end to QE?

© Investment & Business News 2013

  1. Gold will shoot up. When markets are in doubt there is an uncontrollable addiction to gold bars, which have little use other than stashing in vaults !

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