According to Plan
by Sinclair Noe
Don't worry. Everything is going exactly according to plan. The Fed will taper just a little; cutting back to $75 billion a month in Treasury bond and mortgage backed securities; the cuts will trim back equally from both categories. You'll hardly notice.
The Fed said: "In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the committee decided to modestly reduce the pace of its asset purchases.” Great news for people in the hunt for a job; everything is good. And for those of you with two jobs, well your doubled efforts have not gone unnoticed. The Fed expects unemployment to dip to 6.3% to 6.6% by the end of the year, what with more people dropping out of the workforce and the participation rate shrinking. Besides, the current 7% unemployment is apparently just good enough to avoid civil unrest, or as the Fed calls it “progress toward maximum employment.”
The central bank also said it "likely will be appropriate" to keep rates near zero "well past the time" that the jobless rate falls below 6.5 percent. Again, this confirms that everything is going exactly according to plan..., for the bankers; for the rest of us – not so much. But if you are a banker, you have to love free money from the Fed.
It's not like they could continue QE forever; they were running out of stuff to buy. The federal deficit has been shrinking and that means fewer Treasuries. Mortgage rates have increased and that means fewer MBS. And as the Fed dried up supply, that would potentially lead to increased costs in executing QE. The Fed has already dumped $4 trillion on their balance sheet, and even with taper they'll purchase up to $900 billion over the next 12 months.
Inflation has not been a problem; disinflation has. QE couldn't get the prices up on just about anything but stocks and other financial assets. In the press conference, Bernanke said: “If inflation does not show signs of returning to target, we will take appropriate action.” Not sure what that is, but clearly $85 billion a month in QE wasn't the answer. Toss in the idea that our emerging market friends were getting miffed; the Brazilian finance minister sent a letter to the Fed before the FOMC meeting asking them to taper; something to the effect of just do it already!
And so the Fed just ripped the band-aid off the cut. I was a little surprised; it seems Grinch-like heading into the holidays and the Fed's big birthday bash. Goldman Sachs described it as “slightly more hawkish than expectations.” I thought they would wait until January or March, but in the long run it really won't matter. QE has not done the job intended because the money never went where it was most needed. Bernanke's helicopter hovered over Wall Street, the bags of money were tossed out, and sucked into a black hole, also known as the banks. The money never moved.
The Fed created debt-free money and bought government debt with it, returning the interest to the Treasury. The result was interest free credit for the government; which was great for reducing the debt load, but the government never took the extra step of deploying super cheap money into the economy. And then the fatal flaw was that QE delivered money to the accounts of the creditors while doing nothing for the accounts of the debtors. There is still plenty of bad debt floating around, and there is still a debt problem. The Fed never extended its largesse to Main Street, and Congress is just contrary to economic growth.
In his final press conference after the FOMC meeting, Bernanke said “the recovery remains incomplete,” and he repeated the idea that tapering is data dependent, suggesting the Fed could always come back in and increase securities purchases on an as needed basis.
So Bernanke will leave the Fed in January and this wraps up, sort of, lingering loose ends; he'll hand over control to Janet Yellen and not leave her with the task of explaining taper. He leaves with one final short squeeze for the market bears. I'm not sure why the markets soared to new highs on this news, since it would seem to portend higher interest rates and higher interest rates tend to portend lower corporate profits and lower stock prices. But then rates have been going up anyway. Ah well, you know the old saying: don't fight the Fed, at least not today.
The Fed will taper; you'll hardly notice, because it was never meant for you and me, just whatever scraps might fall our way; what they call the “wealth effect”. Ben is leaving and maybe his legacy will be that everything went according to plan, it's just that the plan was all about Wall Street and not about Main Street.