The market was in suspended animation for a few days ahead of Bernanke’s testimony. He came out and said what he has been saying for a month — the Fed will taper when the economy is strong.
So what are we going to do now? Watch economic indicators. Sadly, there is absolutely nothing on the calendar tomorrow so we have to wait until next week for any kind of direction. Even then, it’s thin housing data until next Friday’s durable good report.
The good news right now is that good news is being treated like good news. A taper has been effectively priced in and the timing isn’t all that important to stocks or the dollar. The Fed’s balance sheet has grown close to $3 trillion, whether the Fed buys another $500 billion or $300 billion over the next year isn’t that big of a difference.
Fed balance sheet, total
What’s more important right now is the strength of the economy. If the US economy can lead developed world growth, investment will flow in. If Congress would cooperate for a moment and loosen the taps on near-term spending (while providing some certainty on the long-term) it could mean surging growth.
