The S&P 500 fell for the first time in 2013 after the minutes of the January Federal Open Market Committee (FOMC) meeting that were released suggested that the current quantitative easing program might be retired sooner than previously expected. The markets and investors enjoyed a record-high run in January and February after the December 2012 announcement that the FOMC intends to maintain monetary policy accommodation so long as unemployment remains above 6.5%. The recent drop in the markets reconfirms that the Fed and its policies are a huge driving factor behind investor confidence.
Last week, in his congressional testimony, Chairman Bernanke defended the current quantitative easing program and gave strong indication that it would remain in place for the foreseeable future. Bernanke pointed out that the asset purchases have boosted the housing and labor markets, and have driven a wealth effect that is now supporting consumer spending. The Chairman also recognized the risks of pouring money into the system, such as the threat of inflation and potential excessive risk taking by market makers, but said that the costs currently do not outweigh the benefits. It was clear that his goal was to disprove speculations that the January FOMC minutes gave a signal that monetary tightening is near.
Bernanke further reinforced his point in a speech in San Francisco a few days later and offered strong assurance that monetary policy will remain accommodating. He added that it would be "quite costly" to the U.S. economy, and possibly counterproductive, for the central bank to pull back too soon.
The automatic budget cuts under sequestration are scheduled to begin, and they will total $85 billion through the rest of 2013, and $109 billion per year between 2014 and 2021. However, the withdrawal of fiscal stimulus does not appear to be impacting the growth state of the economy. Manufacturing is expanding, core durable goods orders continue to heal, and existing home sales are rising. Additionally, The Conference Board Leading Economic Index improved too. This all points to a recovery that is more likely to continue than not, although the pace of expansion is expected to be slow.