Global markets briefly rocketed on Wednesday as the Fed’s rate-setting body published a prepared statement, following its May meeting, which indicated it had no plans to reduce its $85bn (£56.3bn) monthly purchases of treasuries and mortgage-backed securities.
“Fostering our congressionally mandated objectives of maximum employment and price stability requires a highly accommodative monetary policy,” the statement said.
However, in a testimony to Congress, Mr Bernanke then made surprise hawkish remarks, warning that the flow of monetary easing, known as quantitative easing, could be altered “in the next few months” depending on the strength of economic data.
“If we see continued improvement and we have confidence that that is going to be sustained, then in the next few meetings we could take a step down in our pace of purchases,” he said.
“If we do that, it would not mean that we are automatically aiming towards a complete wind-down.”
A combination of Mr Bernanke’s comments and weak Chinese economic data overnight caused sharp losses to global equities and the dollar on Thursday. The Japanese Nikkei fell 7.5 per cent, while the FTSE All-World index dipped 1.4 per cent.
Peter Dixon, global equity economist at Commerzbank, said he expected markets to suffer further difficulties, but that the same would be true of any region in which the central bank “has ramped up its balance sheets”.
“The market’s reaction was overdone,” he said.
“If the market continues to rally, it makes it more vulnerable to corrections such as this – the faster the markets go up, the faster the correction when news comes out they don’t like.”
Adrian Lowcock, senior investment manager at Hargreaves Lansdown, said the factors which had supported recent stockmarket runs are “still intact”.
“Such a sharp fall appears to be an overreaction to what was the merest hint of a change in attitude from the US Federal Reserve,” he said.
“Markets never rise smoothly, and falls or corrections are par for the course. It is important to put this in context. Prior to Thursday last week, the FTSE 100 had risen consecutively for 16 days, and even after the drop it has only slipped to levels seen last week.”
Chris Darbyshire, chief investment officer at Seven Investment Management, said the impact of a potential end of quantitative easing on the market was “mainly psychological”.
“It’s hard to pin down the direct impact – it may be more a case of investors worrying that other investors think QE is important,” he said.