No Taper Is Worst Outcome

The circle of logic is getting smaller. The Federal Reserve just announced that it will maintain the pace of bond buying, or quantitative easing (QE), at $85 billion per month, even though everyone (me included) expected some sort of slowdown. The reason we all expected it was because THE FED made every indication in its last meeting, as well as subsequent speeches, that it would slow purchasing. Silly me for listening to them. But the Fed’s reasoning for staying the course shows excellent analytical skills.

First, the Federal Open Market Committee (FOMC) members are worried about the effects that higher interest rates are currently having on the economy. Where did those higher interest rates come from? Rates started marching higher after April, when the Fed told the world it was strongly considering slowing down bond purchasing sometime this year. We all took them at their word. When a guy and a couple of friends who own a printing press are cranking out $85 billion per month to purchase Treasuries and mortgage-backed bonds tell you they are going to slow down, you listen, right? Of course this makes interest rates go up.

When the Fed tapers the pace of QE, it means a major bidder is leaving the marketplace, albeit slowly. Bond markets will have to find equilibrium − where buyers and sellers match up in their interest rate expectations − without this big purchaser in the mix. Obviously, rates will be above the current levels. The fact that higher interest rates will affect many parts of the economy is a given. That’s why the Fed worked to lower rates in the first place! It is beyond belief that the Fed would identify the ill effects of higher rates as a reason to keep printing.

Then there is legislative uncertainty. I must have missed something during my undergraduate and graduate coursework as well as my decades working on and around Wall Street. For the life of me I cannot remember where in the Fed’s marching orders it says that the organization is supposed to compensate for “legislative uncertainty.” Last time I checked, legislative uncertainty was supposed to be handled by another group. You know… the one called the legislature.

None of this is convincing. I am not sure of many things, but I am certain that the members of the FOMC, from Chairman Bernanke on down, are all very smart people who clearly spend their working lives immersed in economic data. These people know ONE thing. The economy is not in a meaningful recovery. It has plateaued just above the zero line. Markets shoot higher, but wages are stagnant. Homes prices are up, but construction employment is in the cellar. GDP growth is anemic. Five years and trillions of dollars later, we’re still on life support, still connected to an adrenaline, or QE, IV.

All of this leaves us in the familiar and unsettled position of not knowing what to expect. Will the Fed taper? Of course it will. When? Who knows. What investor or risk manager wants to act on the recent information? Who wants to load up on bonds or other fixed income products today simply because the Fed tells us that tapering has been put off for maybe a few weeks or months? This resolves nothing! Instead, it actually amplifies the exact thing the Fed is trying to fight – uncertainty. Nice job, Ben.

What the Fed should have done is clear: begin to taper at some modest level, perhaps trimming bond buying by $15 billion per month, and then set up a rough time frame for ending QE altogether. It could have been stretched out over 15 months to make it less disruptive, with the caveat that it could be changed as time goes on.

So much for reasonable policies from reasonable people.

Rodney

 

Ahead of the Curve with Adam O’Dell

Who Says 5% Unemployment Should Be the Goal?

Just yesterday, I frankly shared how tired I am of hearing, talking, reading and writing about the Fed.

Gold Will Fall to $700/oz

Harry Dent, a Harvard-educated economist, and bestselling author reveals why and when gold prices will plummet. Find out more in Harry Dent’s new report, Gold Will Fall to $700/oz!

LEARN MORE
Categories: Economy

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.