finance.yahoo.com). Yesterday the Federal Reserve signaled it may refrain from further monetary stimulus unless U.S. growth decelerates. Some observers claim that the stock market has an "obsessive fixation on the Fed & Q3" (economicmusings.com), meaning that many traders have been buying stocks just as a bet on more expansive monetary measures.
If these explanations are correct the negative market reaction should be very short termed. The Fed is right: There is no need for Q3 because the U:S. economy doesn`t need more monetary stimulation. The economic upswing is now self-sustaining because manufacturing is growing, thanks to rising exports to China and other emerging markets, cheap natural gas and the continued job market healing process. Both developments are fueling the climbing consumer spending.
The abandonment of QE3 now seems to cool inflationary expectations, as the falling price of gold shows. Many traders have been buying gold because they were speculating that QE3 could trigger inflation. The new signal from the Fed also explains the fresh pressure on the oil price, because the speculation on QE3 was one of the arguments for buying oil futures, besides bets on a possible war against Iran. The falling energy price is highly welcome because it leaves the consumers more money to spend for other goods.