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.

By Anthony Mirhaydari Dec 12, 2012 2:35PM

Image Federal Reserve Building copyright Hisham Ibrahim, CorbisOn 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.

 

Be sure to check out Anthony's new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at anthony@edgeletter.c​om and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.

33Comments
Dec 12, 2012 3:05PM
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Perfect QE-4 !    More money not worth the paper it is printed on = The collapse of the American economy ! Dismantle the FED it is a Criminal Operation who's only interest is to protect the (TBTF) Banking Cartel while they RAPE ,PILLAGE AND PLUNDER the American People !!   Take your money out of these Banks it is safer in your own hands !!!
Dec 12, 2012 7:10PM
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Here they go again! Criminal Bernanke debasing the dollar and heading the US to total bankruptcy. End the Fed, someone has to stop it !!!
Dec 12, 2012 2:56PM
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Inflation is just another Tax...

Taxing and Inflation are methods to SLOW economic growth.   It is good to know that we are need to apply the brakes...

Obama is an imbecile if he believes raising taxes will spur employment or growth....
Dec 12, 2012 6:08PM
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FOX AZ

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.

Dec 12, 2012 7:13PM
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Impeach Bernanke before he exterminates the whole US economy !!!
Dec 12, 2012 5:37PM
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As we approach the much bigger cliff, monetary meltdown, all American men are advised to sleep only with Kalashnikova.  She is known for low maintenance and being multi-orgasmic.

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.
Dec 12, 2012 4:53PM
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Hi Anthony;  You are now, I believe,  in stride with most knowledgeable Americans as well as the long term American  investor.  Doesn't it feel good to say the stuff you know in your gut is true and listen to folks respond with their appreciation for straight talk?  You told the truth and now folks will beat a path to hear more.  Good for you.  If you have time or hear more in regards to incorporating the EU into our economy as an article here stated a few days ago could you relay more about that to us? I like to hear stuff a little ahead of the masses or stuff they may not appreciate as well as pertinent info in regards long term economic planning.   I understand you have many contacts we don't and you being a conduit for new info is sugar to my ears.        .Happy Holidays.
Dec 12, 2012 4:24PM
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The 1 in 4 Mirhaydari article that makes sense.  This is spot on.
Dec 13, 2012 12:56AM
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The bonds that the FED buys up just limits investors to buying stocks.  And those bonds should be sold to the FED at 0% interest.  This is the same old game of the FED basically printing money and giving it to the government.  And by the way, how much property does the FED own now after buying all those mortgage backed securities?
Dec 12, 2012 4:50PM
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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.

Dec 13, 2012 2:21PM
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Like we mentioned yesterday after manipulators sold off for no apparent reason other than to cheat some more; today the cheating will continue and, we were right....Somewhere around noon time, after "limp penis look alike" Harry Reid opened his hateful trap, scumbags saw it as the perfect excuse and started selling off again...Don't be surprised if we fall triple digits today...Well, we still have about 2 and a half hours to go...More later.
Dec 12, 2012 5:42PM
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Invest in ADR'S the dollar is in decline TTM great stock in Rupees
Dec 12, 2012 4:18PM
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IF YOU READ THE BOOK- Fiat Money Inflation in France by Andrew Dickson White, you can pretty easily find our equivalent circumstance in the time line pages. The deal now is- that these new issues will accelerate our debased condition. In other words, there are about to be additional bad aspects to contend with. This Fiscal Cliff argument is utterly ridiculous. Raise the taxes and cut off all entitlements, restoring only what endangers people who lack alternatives. Dump the Tax Code. Remember that our homes have lost substantial value and 1 in 5 are in foreclosure. They and the vacant buildings nationwide are being scooped up by REITs. Those are Real Estate Investment Trusts who like Big Bloated Corporations, pay Accountants to get out of tax obligations. Unless we stop the corruption, we will never recover. A Uniform Operating Platform is needed, without it we're going to need another QE by late January according to the book. 
Dec 12, 2012 6:26PM
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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....

Dec 12, 2012 5:31PM
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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! 

Dec 12, 2012 6:22PM
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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.

Dec 12, 2012 6:04PM
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Ha !!......We are going to get a 1.7% raise, info came in mail today.....WoooooHoooooo!!

 

And NO raise in Medicare.....yet.......WooooooHoooooo !!

Dec 12, 2012 7:26PM
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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.. 

Dec 12, 2012 6:14PM
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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. 

Dec 12, 2012 8:38PM
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That gonna be a Big Genie RIA,....Let's hope this jump-starts working, until we get some minor tax increases and major cuts in spending....

It does give hope to some, despair to others....But has helped in turning us around.

 

I think with Greenspan, it was to herky jerky, therefor giving us to immediate highs and lows...

And a very rough ride for the average American.

 

With a fiscal cliff in orderly fashion an gone from the picture....We can all start bitching about Greece again...

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