On Wednesday the Fed released the minutes from its July 30-31
policy meeting. Minutes from the meeting
showed that most members of the FOMC agreed that a reduction of the stimulus
was not yet appropriate. Only a few
thought it was time to “slow somewhat” the pace of the stimulus policy.
Investors
continue to fear that the Fed will start to slow its $85 billion monthly asset
purchases, with most predicting September as the beginning of the end of the
aggressive quantitative easing (QE) program.
This fear was manifested beginning in June as foreign investors sold
U.S. Treasuries to the tune of $489 billion in that month alone. The annualized rate of Treasury notes and
bonds sold over the last three months was $271 billion. In more recent days, Asian currencies have
declined as investors fear tighter Fed policy will starve emerging markets of
investment funds.
Zero
Hedge’s Tyler Durden observed: “Somehow to
foreigners, Bernanke’s Taper Tantrum was a more shocking event than the biggest
bankruptcy filing in history (one which launched the global central bank
scramble to buy up everything that is not nailed down).” See chart below.
Although
Wednesday’s FOMC minutes provided no concrete timetable for the slowing of QE3,
the handwriting is clearly on the wall.
Investors, particularly foreign investors, sense the end of the Fed’s
easy money policy is near and have acted accordingly by selling stocks and
bonds. U.S. investors have been much slower
to react but even they are beginning to sense that QE’s days are numbered.
The
rising Treasury yield since May is not, as some economists affirm, the result
of a strengthening economy. Rather it’s
a consequence of the market’s anticipation of the withdrawal of stimulus by the
Fed. To put it in colloquial terms the
market senses the Fed will soon “kick over the milk pail” if it hasn’t already.
Consider:
during the boom year of 1999 the Federal Reserve under Chairman Greenspan began
tightening money and eventually succeeded in precipitating the 2000-2002 “tech
wreck” and recession. Then after a
period of loose money in 2002-2003, the Fed started tightening money again in
2004 and continued to do so until the onset of another recession and bear market
in late 2007.
After
dousing the flames of the credit crisis in late 2008/early 2009, the Fed under
Chairman Bernanke has largely embraced a looser monetary policy in the last
four years. But once again the Fed is
telegraphing its intention of ending its easy money policy, just in time for
the upcoming deflationary cycle bottom in 2014.
Either the Fed is averse to prosperity as its critics have alleged or
else its leaders have the worst sense of timing. As I mentioned in a previous posting, tight
money is properly defined as “reduced expectations of future spending.” Based on this definition, the Fed has already
begun tightening.
Unfortunately,
kicking over the proverbial milk pail is what the Fed excels at and it’s a
likely bet that it will once again
undermine what, for the most part, has been a successful recovery effort. A premature ending to QE3 would all but
guarantee a resumption of economic weakness with the potential for deflationary
pressures to accelerate next year as the long-term deflationary cycle makes its
final descent.
