The End of QE?
It looks like the Fed will be tapping on the brakes sometime in the near future, although the date has yet to be determined.
Stocks headed lower on Monday following an unofficial announcement from the Fed that the Central Bank had settled on a process for winding down its bond buying program called QE. While the article–which appeared in the Wall Street Journal– did not set a specific date for QE to end, it did say that the Fed had a plan for scaling back stimulus depending on economic conditions. According to Fed-mouthpiece Jon Hilsenrath:
“(The Fed) plans to reduce the amount of bonds they buy in careful and potentially halting steps, varying their purchases as their confidence about the job market and inflation evolves. The timing on when to start is still being debated….
Officials are focusing on clarifying the strategy so markets don’t overreact about their next moves. For example, officials want to avoid creating expectations that their retreat will be a steady, uniform process like their approach from 2003 to 2006, when they raised short-term interest rates in a series of quarter-percentage-point increments over 17 straight policy meetings.”
Clearly, the Fed is trying to allay fears that it’s going to quickly turn off the liquidity spigot and leave the markets to fend for themselves. But traders are still worried, which is why stocks dipped into the red all day Monday despite good news on retail sales. The fact is, even mentioning “taking away the punchbowl” has an adverse affect on the markets. This presents a problem for the Fed chair Ben Bernanke who’s looking for a viable exit strategy, but doesn’t want to trigger a selloff in the process.
The Fed sent up a second trial balloon on Tuesday via Philadelphia Fed President Charles Plosser who said in a speech in Stockholm that the Fed might “scale back the pace of purchases as soon as our next meeting.” If the Fed is serious about ending its large scale asset purchases (LSAP), there should be more warnings on the way.
While QE has never achieved it’s stated objectives– to reduce unemployment or jump-start the real economy–it has helped to buoy stock and bond markets. In fact, the Dow Jones Industrial Average (DJIA) just crashed through the 15,000 mark while the S&P 500 surged beyond 1,600, up an eye-watering 141 percent from its March 9, 2009 low of 665. Of course, the downside of zero rates and liquidity injections is the prospect of asset-price bubbles, the likes of which are appearing everywhere from junk bonds to farmland.
Predictably, see-no-evil Bernanke denies bubbles-in-the-making despite the fact that corporate bond yields have dropped to historic lows (“Merrill’s junk bond index yield crossed the historical low of 5% last Thursday”–sober look) and corporate credit markets are overheating. Here’s Bernanke on Friday:
“In light of the current low interest rate environment, we are watching particularly closely for instances of ‘reaching for yield’ and other forms of excessive risk-taking, which may affect asset prices and their relationships with fundamentals.”
“Fundamentals”? Earnings and revenues are either flat or declining, unemployment is still above 7 percent, 25% of homeowners are underwater on their mortgages, 47 million people are on food stamps, and the US Congress just voted to slash public spending by nearly $100 billion dollars
which will be a further drag on growth. And Bernanke’s talking about fundamentals? The markets aren’t driven by fundamentals, they’re driven by the Fed’s guarantee of zero rates, uber-leverage, and boatloads of funny money complements of Helicopter Ben. The so called “Bernanke Put” has fueled animal spirits and a buying binge that has pushed stock indices to record highs while margin debt is just a whisker below its 2008 pre-Crash level. Here’s how economist Nouriel Roubini summed it up in an article on Slate:
“The problem is that the Fed’s liquidity injections are not creating credit for the real economy, but rather boosting leverage and risk-taking in financial markets. The issuance of risky junk bonds under loose covenants and with excessively low interest rates is increasing; the stock market is reaching new highs, despite the growth slowdown; and money is flowing to high-yielding emerging markets….
The exit from the Fed’s QE and zero-interest-rate policies will be treacherous: Exiting too fast will crash the real economy, while exiting too slowly will first create a huge bubble and then crash the financial system. If the exit cannot be navigated successfully, a dovish Fed is more likely to blow bubbles.”
Bernanke realizes by now that he will not hit his targets of 2.5 percent inflation or 6.5 percent unemployment before he’s forced to reduce his monthly bond purchases. It was all a fraud anyway. QE was designed to do exactly what it does, goose stock prices so filthy-rich plutocrats can skim more cream off the top. On that score, it’s Mission Accomplished.
But there’s no way the Fed can gradually taper off its buying without sending stocks into a nosedive. Whatever the real impact of QE might be, traders believe that it’s the gas that fuels the rally, which means that they’ll be watching for any change in policy.
So when Bernanke scales back on his buying, the dash for the exits will begin.
MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. Whitney’s story on how the banks targeted blacks for toxic subprime mortgages appears in the May issue of CounterPunch magazine. He can be reached at firstname.lastname@example.org.