Fed preps more cheap money
The Federal Reserve extends its open-ended commitment to provide monetary policy support. But this time, there's a catch.
On Wednesday, Federal Reserve policymakers delivered what Wall Street expected: It will commit to a fourth round of quantitative easing or "QE4" in the guise of ongoing $45 billion-a-month Treasury bond purchases.
This will be combined with the $40 billion-a-month in mortgage security purchases that began under "QE3" back in September. (QE4 will replace the expiring "Operation Twist" initiative, but will be more aggressive since it represents new dollar creation rather than the selling of short-term bonds to buy long-term bonds.)
But here's the kicker: The Fed has replaced its low-rate commitment through 2015 with policy thresholds. Now, it will keep interest rates low unless unemployment drops below 6.5% or inflation rises above 2.5%. Given food and energy supply constraints, inflation could limit the Fed's stimulus sooner than many believe -- forcing the Fed to either abandon its commitment or start raising rates. Here's why:
Already, the Consumer Price Index is growing at a 2.2% annual rate. The Core CPI, which excludes food and energy, is growing at a 2.0% rate. Also, the Core Producer Price Index is rising at a 2.5% annual rate after posting one of its largest one-month post-recession gains in November.
While food and energy prices will remain volatile and affected by the health of the global economy, the real driver of the recent increase in inflationary pressures has been the rebound in housing. Specifically, the increase in apartment rents as shown below.
After years in the doldrums, household formations are creeping higher again as young adults once again move out on their own. With mortgage credit still tight, people are competing for attractive rental properties.
Should this measure continue to rise, the Fed could be forced to pull back on stimulus to honor its new commitment well before hitting its unemployment target.
That's because, despite a drop in the unemployment rate from 8.3% to 7.7% over the last few months, as I discussed in a recent post, the drop has been driven largely by a reduction in the size of the workforce rather than an overwhelming surge of new jobs. If the economy actually improves, these people will reenter the workforce and put upward pressure on the unemployment rate.
The other option is that the funny business with the employment numbers continues, in which case on current trajectory we will hit the 6.5% unemployment rate in mid-2013 -- forcing the Fed to pullback when the real, underlying jobs picture remains difficult.
So the overall takeaway: The Fed will continue to buy bonds at an $85 billion-a-month rate; it will be slightly more aggressive in its creation of new dollars; and the establishment of policy thresholds increases the chance that higher inflation, rather than a stronger job market, is the catalyst that forces it to pullback.
Stocks and other assets are performing their usual post-Fed spasms. Once things settle down, I expect traders will connect the dots and view today's events as a net negative for the cheap-money, higher-stocks game we've been playing since 2008.
Combined with new recessions in Europe and Japan and the unresolved "fiscal cliff" here at home, I expect stocks to fall from their current levels in the weeks to come. In fact, we could be on the cusp of a new bear market, according to some research I'm seeing. I'll have more to say about that next week.
For now, I recommend investors book long profits and move to cash.
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excellent analysis and overview anthony. this is going to be a difficult (and very big) genie to get back in the bottle. as long-term investors, we remain bearish as the fundamentals are weak ...
All the advanced degrees IN ECONOMICS get it wrong 90% of the time. So let's not try to pull the credential card to advance your views. Put something down more in depth here.
There are different drivers of inflation. Assuming the money supply is not centrally tampered with, prices will have short term variability with demand and supply for various goods and services. But when you have decades of money printing, you get overall price increases every year. If you keep spending beyond the ability of the private economy to keep up in taxes, you borrow and accumulate debt. Servicing and crowding effects from the accumulated debt starts to drag on the economy and the Fed starts to print its way out of it. Then you eventually get a hyperinflationary bubble for the final economic grind down.
Oh Jefferson, you had it pegged so well. Most people can't get enough central authority. It's -- just like during the American Revolution --- about 20% of the people did something about it. The other 80% were sticking with the King or status quo. Who can blame them. They just wanted to be comfortable and not make waves. So -- a few more restrictions on freedom --- oh what the heck.
I am sorry I have difficulty with fed. Greenspan got blindsided for years until we crashed. I am not sure technical analysis driven liberal policy that is not producing results is worry some.
Forces that are in play will not allow growth in jobs. Level of education, Immigration, productivity, Overwhelming tech dominance, non innovative fiscal policy and this old fashioned gumbo jumbo dressed in modern terms will solve our job problems. This will create long term unemployable problem that will cripple our society. Bernanke is a nice guy, but I am losing confidence.
There is a leadership issues in managing economy and jobs. There are affordability issues in terms of supporting lesser successful and handicapped by old age or reality. Ultimately it will require some strong decisions to put together all these, find sacrifices, out some restraint and understand what we have to pay to Government and still keep our capitalist economy.
If education cost, quality and relevancy is not addressed we are in deep trouble. Education through tech need to reduce cost by 50 tp 70 %. We can afford to pay for better education by paying for sending our young people to foreign country and importing foreign trained personnel on fix number of years.
I lack confidence in leadership at all levels of our society. May be problem is world wide. If it is so we need to have serious thinking how to manage population, communication, work, living expense and living itself. Question is not what is morally right policy but what is right policy that is affordable, sustainable and can lead to reasonably good standard of living for us. Old morality has to be discarded. I cannot help my brother if I am having difficulty feeding my own family. Employed poor cannot support unemployed poor. that is where we are leading.
Why do you get 3-4 thumbs down on here when you talk about investing...
Are 3 of you stupid, morons, jealous, or not investors.....Why are you here..??
This does not happen at other investment sites....
F you Anthony,
I lost all respect for you! I believe it was the very day after you called for Santa clause rally you said the run cant continue and now you say the start of a bear market. I Bet monday you'll say we'll surge ahead in the new year.
Your column belongs in the onion!
I'm not going to crank on Blondy....But seem's if several are missing her/his? point...
Having Degrees in Economics is not an end-all for investing.....BUT,
Any knowledge we can gather in life can give one a leg-up.
And investing is about Research,research,research, DD....Period.
EVEN if you use a Broker,Financial Advr, Friend or Family for investing....
You should take a certain amount of interest in what YOUR MONEY is DOING.
If you are on here very much....I DON'T UNDERSTAND, why you wouldn't.
Ha !!......We are going to get a 1.7% raise, info came in mail today.....WoooooHoooooo!!
And NO raise in Medicare.....yet.......WooooooHoooooo !!
Sell some of that Gold/Silver Classic.....Hasn't been much higher then $1900 for a very short period of time....At least recoup your investment...
But don't sell it all, OR ALL AT ONCE...
If you don't, you don't but hoarding at this price right now, isn't the best thing to do....If you have under $350 per troy into it....IMO..
Good luck., either way..
Classic........Quick question ??.....Why are you investing or buying/storing Gold and Silver...??
Bullion really has never been a good investment PERIOD....The Bang for the Buck.
A lot of hidden charges and fees....And questionable dealers or dealings....IMO.
There are several good Gold and Silver miners, other Precious Metals..PGMs.
There are also ETFs and many Mutual Funds...Active knows some Funds
But many are easy and cheap to trade in and out of....Some may have a few charges, but depends on what kind of Portfolio..ie;.Brokerage,IRA, ROTH, etc.
Just think it is a better way to play the PGM's Game...IMO.
But if you do miners, you have a lot more research to do......Also IMO.
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