As investors intensify their scrutiny of the Federal Reserve, economic indicators continue to send out mixed messages. Inflation, as measured by the CPI, eased once again in August, according to theBureau of Labor Statistics, but remains relatively anchored, indicating Chairman Ben Bernankeand the FOMC could be closer to tapering quantitative easing, possibly on Thursday.
Mixed economic indicators continue to baffle a market that seems to have prepared for a reduction in the Fed’s supportive asset purchases, or QE. Inflation, one of the main monetary factors observed by Fed officials, has been consistently low, yet not alarmingly so. Over the past 12-months, CPI is up a meager 1.5%, down from 2% in July.
While the U.S. economy has remained relatively resilient, with GDP growing 2.5% in the second quarter, it is by no means out of the woods, as the labor market remains weak and financial conditions have tightened, particularly in mortgage markets which are closely scrutinized by the Fed, Goldman Sachs’ economics research team said.
The Federal Reserve, which is in the midst of a transitional period as Chairman Bernanke’s term expires early in 2014, is looking to reduce its level of asset purchases to avoid inflating asset bubbles and creating further imbalances. Investors are looking for the FOMC to cut down on QE on Thursday, possibly reducing asset purchases by $5 to $10 billion to $75 to $80 billion a month.
In order to continue with the plan laid out by Bernanke in his previous conference, in which the Fed expects QE to end by mid-2014, Fed officials will want to see a pickup in inflation that strengthens their view that deflation is not a looming problem. “While the stabilization in core [CPI] is likely sufficient for Fed officials to start the tapering process [Thursday], officials are counting on some acceleration in coming quarters,” explained Jim O’Sullivan, chief economist at High Frequency Economics, who added, “such acceleration will likely be needed for a full wind-down of QE and will almost certainly be needed before the tightening cycle begins.”
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A very good overall summary of the existing US Economic and Financial Market state that comes to a wrong conclusion. It somehow assumes that the Fed and US Government are in control of the US Economy and will direct it into whatever direction they wish to improve existing metrics and to maintain the course.
However, that is a fools assumption. They are not in control of anything. The 2007-2009 meltdown was a clear example of that. No matter what they have tried, the market kept going down until it hit its March 2009 technical bottom and reversed itself. If that doesn’t convince you of the fact that they have no control, nothing will.
Now, the article states that the policies the Fed has instituted are design to avoid future financial asset bubbles and volatility associated with it. What it fails to mention is that we are ALREADY in the largest financial credit bubble of all time. Bigger than 2007. And guess what, it was done on purpose by the Fed to avoid a deeper recession.
As Fed cut back on QE, interest rates will go up and in doing so will collapse the real estate market, the stock market and the overall economy. Oh, I forgot to mention something. It will not be fast and will most likely take years. However, the process itself has already started. Get your affairs in order.
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