Bernanke Triggers Summer Storm

This week, investors on Wall Street will focus on the meeting of the leaders of the American central bank, which could calm the market after stock prices fell in three of the last four weeks.

The Dow Jones index weakened by 1.2 percent last week, to 15,070 points, while the S&P 500 slid 1 percent, to 1,626 points, and the Nasdaq index fell 1.3 percent, to 3,423 points.

Uncertainty has prevailed on Wall Street since May 21, when Fed Chairman Ben Bernanke stated that the central bank leaders could decide on reducing stimulus monetary programs at one of the upcoming meetings if the economic situation improves.

As part of the so-called quantitative easing monetary policy, introduced four years ago, the Fed injects cheap money into financial markets by purchasing government and mortgage-backed securities worth $85 billion per month, in order to keep long-term interest rates low, stimulate lending, and promote economic growth.

This has long been driving stock price growth, so investors fear a price correction downward if the market loses that support. Therefore, all signals that could indicate what the Fed will do regarding stimulus programs have been carefully monitored for weeks.

Various comments from Fed officials have not contributed to calming the market, as some advocate for the continuation of loose monetary policy, while others call for a reduction of these programs.

“Bernanke’s statements from three weeks ago triggered an early summer storm, not a big one, but enough to make investors nervous,” says Fred Dickson, a strategist at D. A. Davidson.

The Fed’s plans could become clearer on Wednesday when, after a two-day meeting of Fed leaders, Bernanke will hold a press conference.

“Bernanke is unlikely to present all the details that investors hope for. However, I believe he will try to reduce uncertainty in the market,” says Dickson, adding that Fed leaders will likely indicate that changes in monetary policy will be gradual.

Investors fear that withdrawing stimulus measures before the economy is firmly on the path to sustainable growth could trigger a decline in stock prices.

Since the beginning of the year, the S&P 500 index has risen about 15 percent, reaching the highest levels in history in May.

“As mixed signals about economic growth arrive, even the slightest reduction in stimulus measures would have significant consequences. If the reduction occurs too early, I think it would significantly increase risks to the prices of financial assets,” says Bucky Hellwig, vice president at BB&T Wealth Management.