Fed Meeting October 2013
“…the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of purchases“- Federal Open Market Committee statement of October 30, 2013 from the Federal Reserve deciding to keep their quantitative easing program intact.
The Decision – No Taper
The Fed met earlier this week and again delayed the moment when they might start to shut down their money printing quantitative easing (QE) $85 billion a month asset purchase program.
In their statement they gave the impression that the five year long QE program is not permanent and would end at some point in the not identified future.
But for now the Fed is relying on misplaced confidence in a pick up in economic activity in the not identified future stating in their release: “the Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate.”
The Fed also, building on their misplaced confidence, stated they would keep interest rates low even after QE ends: “To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.”
This is a worthless promise placed on top of a false promise because QE is needed in order to keep interest rates low. The Fed learned that when they started TALKING about tapering QE interest rates rose. Interest rates are low not because of the Fed Funds rates are being kept low but rather because the Fed is buying $85 billion in mortgage backed securities and U.S. Treasuries each month with money printed out of thin air. If the Fed wants low interest rates they can’t taper QE because without it interest rates would rise, so promising to keep an accomodative monetary policy after QE ends, when QE can’t end without rates rising, is a nudnum pactum.
Why The Fed Did Not Taper QE
Keep The Economic Recovery on Track
The Fed is still promoting the concept that there is an economic recovery and that recovery has been engendered by their QE program. The Fed stated that in order to continue the recovery, we need to continue QE.
The Fed statement read:”(Continued QE) should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery.”
This means there is no recovery without QE.
The Fed also blamed fiscal policy for “restraining economic growth”
Continued Support of the Labor Market
While the Fed like to take credit for a recovery evidenced by rising stock and real estate prices, the Fed admits that the labor market has not kept pace with the recovery in asset prices and noted in their statement QE will continue “until the outlook for the labor market has improved substantially in a context of price stability.” The Fed has set a target unemployment rate of 6.5%
Not Enough Inflation Yet
The Fed has an inflation target of 2% and believes that higher inflation will spur an economic recovery. According to government statistics the Fed’s inflation target is not being met.
How much inflation do you want?
Housing Recovery Has Slowed
The Fed’s housing recovery hit a snag the past few months as interest rates rose on the Fed’s threat of tapering their QE program. The Fed noted the reversal in the housing market saying the “recovery in the housing sector slowed somewhat in recent months.”
Need More Data
The Fed never sees the right or enough data to convince them to shut down QE. In October they didn’t need to use this excuse as they had no data due to the government shut down.
Reaction to the Fed’s statement caused the dollar to rise and gold and silver to fall on the premise that the Fed statement included language that foretold the end of QE at some point in the unidentified future and would therefore limit the supply of dollars and make the dollar more attractive.
We believe that QE in a perverse way actually supports the dollar and that the Fed’s willingness to print dollars gives holders of dollars denominated debt securities confidence that they will be repaid- in short the printing press is the new gold standard.
What’s Next for the Fed
Everything in the Fed’s statement contains the seeds for more QE in the future.
The Fed pretends we are having a recovery, largely based on their rosy projections, not a fair analysis of current conditions. When their projections don’t pan out as expected, we can expect more QE.
After five years of QE the labor market has not improved. We expect the Fed to continue to monitor the unemployment rate which is dropping and will continue to drop as discouraged workers continue to leave the labor force. As we near the 6.5% unemployment mark and markets start to anticipate a taper the Fed will “discover” that the unemployment rate is not an accurate measure of the health of the labor market and will focus on the labor participation rate which is dropping and use that as an excuse to continue QE.
The Fed will also continue to point to the manipulated lower consumer price index as another excuse to continue QE.
The housing market has shown signs of distress due to the higher interest rates of the past few months and the government shut down slowed the pipeline of deals so more Fed QE will be needed to re-stimulate the housing sector.
Finally, the Fed noted that fiscal policy has been a drag on the economy. We are not sure if they mean that Congress is not spending enough money or hasn’t made necessary cuts, but we suspect they mean the former. In any event, we can expect there to be further inconclusive budget debates that the Fed can blame on faltering economic growth and another reason to continue QE.
We expect, however, that the Fed will continue to make efforts to tamper speculation that QE is a permanent feature of the economy. Indeed, the Fed’s unofficial information mouth piece Wall Street Journal reporter Jon Hilsenrath said with a straight face after the October Fed meeting that the Fed might taper QE in December.
Dollars – Get ’em While Their Hot
As long as the Fed has dollars to print, they will have excuses at the ready to print them (while insisting that they intend to stop).
The Fed will continue QE unabated, oblivious to the damage that artificially low interest rates have on the economy.
We expect Janet Yellen to grab hold of the printing press and not let go as the Fed continues to send dollars to the real estate and stock market instead of allowing capital to flow perhaps to more productive job creating areas of the economy.