The Fed is Beginning to Remove the Punchbowl… Are You Ready For What’s Coming?Stock-Markets / Financial Markets 2013 Feb 10, 2013 - 12:25 PM GMT
A month ago, we noted that the Fed was becoming increasingly splintered about how to proceed with its monetary policy. At that time we noted that the latest FOMC minutes indicated that the Fed was in fact conflicted about QE 4 despite its public appearance of being unified:
Consider its recent FOMC minutes released on January 3 2013.
With regard to the possible costs and risks of purchases, a number of participants expressed the concern that additional purchases could complicate the Committee’s efforts to eventually withdraw monetary policy accommodation, for example, by potentially causing inflation expectations to rise or by impairing the future implementation of monetary policy. Participants also discussed the implications of continued asset purchases for the size of the Federal Reserve’s balance sheet. Depending on the path for the balance sheet and interest rates, the Federal Reserve’s net income and its remittances to the Treasury could be significantly affected during the period of policy normalization. Participants noted that the Committee would need to continue to assess whether large purchases were having adverse effects on market functioning and financial stability. They expressed a range of views on the appropriate pace of purchases, both now and as the outlook evolved. It was agreed that both the efficacy and the costs would need to be carefully monitored and taken into account in determining the size, pace, and composition of asset purchases.
Source: Fed FOMC minutes
Remember, the Fed only just announced QE 3 in September 2012 and QE 4 in December 2012. At the time of these announcements, the media heralded these moves as indicating that the Fed would act aggressively forever.
Instead, the Fed was actually quite conflicted about QE 4. And we just got yet ANOTHER major warning sign that the Fed is changing tactics.
Indeed, Fed uber-dove, Charles Evans, who called incessantly for more QE throughout 2011-2012, just stated that the Fed may in fact END QE BEFORE unemployment falls to 7%.
Charles Evans, president of the Federal Reserve Bank of Chicago, said today the central bank may stop its asset-purchase program before unemployment falls to 7 percent.
“I tend to think it might be possible to turn off the quantitative easing,” Evans said in a CNBC interview. “We might be able to stop before 7 percent” assuming momentum builds and keeps going.
Federal Reserve Bank of Chicago Chief Executive Officer Charles Evans said that quantitative easing would continue until it’s clear the labor market outlook has improved.
The bulls and mainstream media are ignoring the implications of this. But this is a serious sign that the Fed will be changing course going forward.
Understand that the Fed has blown a yet another bubble in stocks and cannot simply remove the stimulus punch bowl all at once without risking a total collapse in the market. So the Fed is going to begin managing expectations downward gradually.
The fact that Evans, a man who has called for nothing but more stimulus for more than two years, is now stating point blank that the Fed may end QE before it reaches its target for unemployment is a major warning sign. Do not ignore it.
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Chief Market Strategist
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Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.
Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.
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