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Three words from Ben Bernanke sink the markets: ‘Later this year’ Add to ...

These are stories Report on Business is following Wednesday, June 19, 2013.

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Bernanke sinks markets
Ben Bernanke sent stocks tumbling today by suggesting the Federal Reserve could begin to ease its extraordinary stimulus program within months.

The U.S. central bank held the line on policy today, making no change to its near-zero interest rate or its $85-billion-a-month asset-buying program known as quantitative easing, or QE, The Globe and Mail’s Kevin Carmichael reports.

What investors were looking for was a signal on when it could begin to pull back, and Mr. Bernanke later told reporters it could happen “later this year” as the economy improves.

“The fundamentals look a little better to us,” he said.

“Our purchases are tied to what happens in the economy. If we overestimate what is happening, we will adjust to that. We have no deterministic or fixed plan.”

North American stocks tumbled in response, the fear being that the Fed could “taper” the program before the recovery is ready for that.

The Dow Jones industrial average sank by more than 200 points, or almost 1.4 per cent, while the S&P 500 dropped almost 23 points, also 1.4 per cent, and Toronto’s S&P/TSX composite fell just shy of 100 points, or 0.8 per cent.

Members of the central bank’s policy-setting group, the Federal Open Market Committee, also cut their forecast for economic growth this year to between 2.3 per cent and 2.6 per cent, a change from an earlier 2.3 per cent to 2.8 per cent.

Mr. Bernanke’s comments suggest the pullback on QE could begin in the fall, and end fully by mid-2014.

“Bottom line - no backing down, no turning back, the Fed will taper unless the data deteriorate,” said Kit Juckes, the chief of foreign exchange at Société Générale.

Poloz urges 'patience'
It wasn't just Mr. Bernanke front and centre today, but the new Bank of Canada governor as well.

As The Globe and Mail's Barrie McKenna and Tavia Grant report, Stephen Poloz gave his first speech since he took over the role, appealing for "patience" as an export-led recovery starts to take hold in Canada.

“Right now what we need most is stability and patience,” he said, according to the text of his talk to the Oakville Chamber of Commerce in Burlington, Ont.

Mr. Poloz expressed confidence that Canada is seeing early signs of the export-led pick up – particularly to the United States – that he said will eventually drive growth.

“The gathering momentum in foreign demand, especially in the United States, should help lift the confidence of Canadian exporters,” he said.

The timing of Mr. Poloz's speech raises some interesting questions.

Originally, former governor Mark Carney was to have been the speaker, but, of course, he has now left the post and Mr. Poloz took his place.

“The BoC had an opportunity to scuttle the date, and yet it chose not to and thus put itself smack in the middle of potentially far more important developments at the Fed this afternoon,” said Derek Holt of Bank of Nova Scotia.

“That particularly applies to the timing of the press conference right in between the Fed’s actions within a Fed meeting schedule that has been set last year.”

That begs the question of why the Bank of Canada stuck to the date and time for today’s speech.

“One might surmise that it’s to emphasize how the Fed is a constraint, but I doubt that,” Mr. Holt said.

“What is much more likely is quite the opposite in order to make a point on BoC independence in that the Fed schedule doesn’t dictate BoC actions notwithstanding limits to the BoC’s independence,” he added.

“If so, then this is mostly about optics since I don’t believe that the BoC would be able to front run the Fed on the tightening path at the front end by a greater margin than the current overnight spread.”

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