Wednesday, December 18, 2013

Timid tapering beats none

Today the FOMC announced that it would taper (i.e., reduce) its purchases of Treasuries and MBS by a mere $10 billion beginning next month, and that it would likely take more such baby steps in the future, at a pace consistent with continued improvement in the economy.

$10 billion is such a small fraction (about 6 bps, or 0.06%) of the Treasury and MBS market as to be insignificant. It's the equivalent of easing up on the gas peddle by several microns. The only real impact of today's decision is that it puts the Fed on track—finally—to eventually reverse its Quantitative Easing purchases which began some five years ago, though the beginning of an actual reversal is unlikely to occur for many months. Better to make this decision sooner rather than later, especially given the ongoing improvement in the economy.

Today's timid tapering announcement represents no threat whatsoever to the economy's ability to grow. It would have been worse if the Fed had refrained from tapering, since that might have allowed future Fed chair Yellen to succumb to her dovish instincts and postpone the decision needlessly.

4 comments: said...

Would the stock market have gone EVEN higher with MORE of a taper? God only knows.

Gold sure went the other way. No sign of inflation here.

I keep noticing the Fed talk of a target of two percent for inflation, and would only change policy to 'reign in inflation' if inflation started to exceed 2.5 percent.

It would seem to me that inflation of two percent should be a CEILING, not a target. Inflation of two percent per annum would halve buying power in a little more than twenty-five years.

Benjamin Cole said...

The amount of the taper does not seem significant. I do not know why the stock market rallied, unless it was that the taper would be extended at much the same rate.

As for Yellen being a dove..she has written papers rhapsodizing about one percent inflation targets...

A "dove" today is a Fed official willing to consider 2 percent inflation as a norm....

As it is, we are at 0.7 percent inflation on the PCE deflator....this is the lowest inflation rates we have seen since some fluke-ish readings after WWII and the Korean War....


theyenguy said...

You write, Today's timid tapering announcement represents no threat whatsoever to the economy's ability to grow.

I respond,as soon as the Fed Announcement of Tapering was released, the bond vigilantes exerted control over the Benchmark Interest, ^TNX, and called the dynamo of economic destructionism, higher once again to 2.88%.

Fiat Money, that is Aggregate Credit, AGG, and Major World Currencies, such as the Japanese Yen, FXY, and Emerging Market Currencies, CEW, such as the Brazilian Real, BZF, traded lower on the Fed Announcement of Tapering, communicating the ongoing failure of fiat money.

The Fed Announcement of Tapering is the Fed’s subtle acknowledgement that its monetary policies of QE have crossed the rubicon of sound monetary, caused the failure of fiat money, and in turn made money good investments, such as in the Emerging Markets, EEM, bad.

And the Announcement of Tapering is also the Fed’s subtle acknowledgement that QE has commenced economic destructionism, specifically causing the failure of global economic growth in Brazil, EWZ, Thailand, THD, Indonesia, IDX, the Philippines, EPHE, Peru, EPU, and Chile, ECH, as well as in Australia, EWA.

a sell of the Japanese Yen, FXY, to close lower at 93.89, leveraged US Stocks, VTI, higher; despite, or perhaps better said because, the monetary policies of the US Central Bank have make “money good” investments bad, at least for those stocks outside of the US bad.

At the end of the day, when all was said and done, fiat wealth investments in World Stocks, VT, Nation Investment, EFA, Global Financials, IXG, and Dividend Growth, VIG, were not worth more in the sense they had greater profitability or greater economic capability; rather they were worth more because currency carry traders sold the Japanese Yen, FXY, short in currency carry trade investing.

The sell of the Japanese Yen, FXY, is an unmitigated disaster for Japan, EWJ, as Agricultural Commodities, JJA, and Oil, USO, are now more expensive. Of note, Wheat, WEAT, traded strongly lower, but for the Japanese, they still will have to pay more for it as their currency has been totally debased by the currency traders; Japanese household will be seeing inflationary prices very soon given the Wednesday December 18, 2013, sell of the Japanese Yen, FXY.

The bulls have not taken charge of the stock market. The rally in the stocks following the Fed Announcement of Tapering, was a US Stocks, VTI, Japanese Yen, FXY, currency carry trade rally, that produced a short selling opportunity, in an ongoing bear market that commenced on October 23, 2013, when bond vigilantes began calling the Interest Rate on the US Ten Year Note, ^TNX, higher from 2.48%. The rally in stocks was to have been sold, as in a bull market one buys into dips, but in a bear market, one sells into pips.

Hans said...

The Central bank's balance statement has now swelled to 4 trillion dollars.

Do we see 5 or 6 trillion ahead?

The Federal Reserve is already losing money on it's holdings and it will only get worse..

Lucky for them that GAAP is not required.