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     Mar 31, '14

QE, uncertainty and CPI
Commentary and weekly watch by Doug Noland

In last Wednesday's press conference, Federal Reserve chair Janet Yellen upset the markets with her comment suggesting that the Fed might commence rate adjustments as early as six months after it concludes its latest quantitative easing program. Several officials have since tried to reassure market participants that the Fed has not moved forward its plans to raise rates. Even

hawkish Fed officials went to pains to communicate that rate moves were not in the immediate offing.

Clearly, the Fed's strategy is to do its utmost to reduce market uncertainty. The ratee-setting Federal Open Market Committee is moving forward methodically to wind down its balance sheet operations, while telegraphing an ultra-cautious rate policy (future, future little "baby steps").

The Fed has good reason to worry about the markets and fret the issue of "uncertainty". And it's difficult to envisage a more transparent - and market-friendly - interest rate policy. And when the markets are in a good mood, it's virtual nirvana. Financial markets - in particular stocks and corporate credit - can enjoy splendid market excess without concern that the Fed might choose to "lean against the wind" of destabilizing speculation. And for the Fed to actually get rates to what would be considered "slamming on the brakes" - harsh enough to puncture powerful market bubbles - well, that would be years away (more likely never).

Yet I would argue the notion that the Fed is capable of bridling market uncertainty is a bubble mirage. Our central bank has thus far been successful in keeping the markets focused on rate policies. Meanwhile, a great uncertainty furtively lurks: what will the end of Fed "money" printing mean for US and global markets, the emerging economies and the US and global economies more generally?

The entire QE issue/analysis is incredibly fascinating. Since September 2008, the Fedís balance sheet has ballooned from about $900 billion to $4.227 trillion. If tapering runs its expected course, QE will end late this year with the Fedís balance sheet near $4.5 trillion. This would leave the latest round of QE totaling almost $1.7 trillion, with the Fedís balance sheet having expanded (a parabolic) 60% in two years. This would also place total Fed asset growth at $3.6 trillion, or 400%, in six years.

And why do I posit that the notion of the Fed harnessing uncertainty is a mirage? Because the Fed doesnít have a clue as to the consequences of the $3.6 trillion of liquidity it has pumped into the markets since 2008. More ...

Doug Noland is a market strategist for the Prudent Bear Funds.

(Republished with permission from PrudentBear.com. Copyright 2005-2014 David W Tice & Associates. All rights reserved.)




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