Esther George, Kansas City Fed President, is a hawk among doves. Here’s why she’s concerned about what’s ahead for the economy, thanks to QE. Read more...
Even as stocks and bonds continue to digest the concept of rising rates and the end of quantitative easing, there are still some great opportunities to land some big gains before any real trouble hits the markets.
QE may be fading away but that doesn't mean you can't profit...
Many have wondered - and rightly so - why the U.S. dollar is rising even though the U.S. Federal Reserve has done just about everything possible to debase the currency over the past five years.
Over the past two years, the U.S. Dollar index, which measures the dollar against a basket of major world currencies, is up by more than 12.6%.
Part of the answer is that most of the world's other central banks have pursued easy money policies similar to the Fed's. In the so-called "currency wars," the U.S. dollar has one major built-in advantage.
"The U.S. has never defaulted," explained Money Morning Chief Investment Strategist Keith Fitz-Gerald. "The world may hate our guts, but when all hell breaks loose, they all love our dollar."
Also helping to explain why the U.S. dollar is rising is that it remains the world's reserve currency - the money a majority of nations use to buy commodities such as oil -- and that the U.S. economy, for all its warts, is in better shape than most of the other developed economies in the world.
"The dollar the best-looking horse in the glue factory," Fitz-Gerald said.
So it wasn't too surprising that when the Fed recently hinted that it might start "tapering" its quantitative easing (bond-buying) policies later this year, the U.S. Dollar index spiked 3.1%.
But Fitz-Gerald said that investors still need to be wary of the stronger U.S. dollar going forward.
This Sept. 2 Event Could Send the U.S. Dollar Crashing
What's driving the stock market - the Fed or company fundamentals?
The answer, of course, depends whom you ask.
Has most or all of the growth in the market over the past few years been due to the Fed's massive QE easy money stimulus?
Or is it fundamentals like earnings per share and the price/earnings ratio?
We asked three experts to weigh in: Money Morning Chief Investment Strategist Keith Fitz-Gerald, Money Morning Capital Wave Strategist Shah Gilani and Brian Wesbury, the chief economist at First Trust Advisors.
Here's their take.
If investors needed a reminder that global stock market rallies have been goosed by the Fed's lose monetary measures, they got it.
On Wednesday, U.S. equities went on roller-coaster ride.
The Dow Jones Industrial Average, up 155 points before FOMC Chairman Ben Bernanke said the Fed could soon begin to tap the brakes, ended the day down 80.41, or off by 0.5%,.
The uncertainty of when the Fed would begin to wind down its $85 billion-a-month in asset purchases sent investors to the sidelines in a hurry.
"This is a very sensitive market and particularity sensitive to any notion that tapering will come too soon," Quincy Krosby, market strategist at Prudential Financial in New York told Reuters.
"No one wants to be selling if the data reaches the point when the Fed begins to specifically talk about tapering. The market doesn't wait for the Fed to move. It will move before. That's how it operates," Krosby continued.
Of course, we knew QE couldn't really last forever. So what should investors do?..
Before the housing market crash, economists warned that record low-interest and mortgage rates were fueling a housing bubble.
Unfortunately, those fears were both overlooked and underestimated.
Now, an advisory council to the U.S. Federal Reserve is warning the Fed that its record $85 billon-a-month stimulus and ultra-low interest rates are fueling new bubbles in student loans and farmland.
"Recent growth in student-loan debt, to nearly $1 trillion, now exceeds credit-card outstandings and has parallels to the housing crisis," according to minutes of the council's Feb. 8 meeting.
In addition, "agricultural land prices are veering further from what makes sense," the council said. "Members believe the run-up in agriculture land prices is a bubble resulting from persistently low interest rates."
How did stodgy traditional banking morph into “casino banking” on a global scale? Shah Gilani explains the crooked path to where we are today… Read more...
The market has been looking ahead to the inevitable end of the U.S. Federal Reserve's quantitative easing (QE) program with considerable apprehension.
Most market observers expect the end of the Fed's QE asset-purchasing program to immediately result in a sharp sell-off in bonds and higher interest rates.
This is expected to hit the mortgage-backed securities (MBS) market, where the Fed has been very active, quite hard.
As part of a policy to communicate more openly with the markets, Chairman Ben Bernanke and the Fed have been regularly launching QE exit strategy trial balloons into the market to see how quickly they get shot down.
The latest exit strategy that has been gaining traction is the idea of "tapering" QE asset purchases so that there isn't a sudden halt to supply of money flowing from the Fed into the Treasury and MBS markets. The markets seem to be pretty sanguine about the tapering idea, although there has been no specific suggestion on timing.
Instead, the markets have been concentrating on how the Fed will get rid of all of the assets it has accumulated on its balance sheet during the QE program.
When Ben Bernanke testified before Congress Tuesday and Wednesday, he staunchly defended his easy- money policies like quantitative easing, or "QE Forever."
"We do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery," the Federal Reserve chairman said.
Bernanke added the central bank takes "very seriously" the excessive risk-taking its dovish policies could provoke and is watching markets carefully.
He maintained that the bank's accommodative monetary policy has "supported real growth in employment and kept inflation close to our target [2%]."
But some Fed officials are growing concerned about quantitative easing - the Fed's purchases of $85 billion in securities a month - and believe it would be prudent to slow or stop the buying well before the end of 2013. Esther George, president of the Federal Reserve Bank of Kansas City, is one of the biggest hawks in the Federal Open Market Committee (FOMC) this year, citing unease about economic stability and inflation.
"While I share the objectives [of the FOMC]," George said in a Feb. 12 speech at the University of Nebraska Omaha, "I dissented because of possible risks and the possible costs of these policies exceeding their benefits...While I have agreed with keeping rates low to support this recovery, I know keeping interest rates near zero has its own consequences."
Despite the increasingly anxious sentiment, as long as Bernanke remains at the helm, QE Forever will be the policy. Here's why.
Equity markets around the world Wednesday expressed their distaste for the possible end of the Federal Reserve's quantitative easing (QE) policy. Share prices tumbled from New York to Tokyo. Here's what every investor needs to know.
Investors will be looking to the Federal Reserve Wednesday for clues about how long it might continue its bond-buying program aimed at pushing interest rates down.
The Federal Open Market Committee is expected to release a policy statement at 2:15 p.m. Wednesday, the second day of its two-day meeting.
In keeping with a practice it began last January, the first meeting of the new year will highlight the FOMC's long-term goals and monetary policy.
The Central Bank likely will reiterate the goal it has maintained all of last year: boosting the stagnant U.S. economy.The Fed's first meeting of 2013 comes after an extraordinarily busy year, capped by two key moves in December.
That's when the Fed said it would continue spending $85 billion a month on bond purchases to keep interest rates low. At the same time, the Fed set unemployment and inflation "thresholds" instead of a date when the central bank expected to be able to raise interest rates.
Amid all of the hoopla over the Standard & Poor's 500 Index touching 1,500 on Friday, it seems few people noticed that the yield on 10-year U.S. Treasury bonds has risen to within a couple of basis points of 2%. That is nearly 30 basis points higher than it was one month ago and 10 basis points higher than one year ago.
It seems as if the bond market is beginning to price in higher inflation at the long end of the yield curve, and that is something that has got to be worrying the Fed.
Successive rounds of quantitative easing (QE) have added a lot of liquidity to the U.S. economy and this has been repeated globally with massive amounts of liquidity being pumped into the market by the Bank of Japan (BOJ), the European Central Bank (ECB) and the Bank of England (BOE).
The Bank of Japan has committed itself to further aggressive easing under pressure from the newly elected government headed by Prime Minister Shinzo Abe. Even if BOJ Governor Masaaki Shirakawa has any second thoughts about additional easing, he will keep them to himself.
After four years of quantitative easing programs, including QE3 just last fall, U.S. Federal Reserve officials have started voicing doubts about its effectiveness and concerns that it is distorting the markets.
And it's not just the Fed's hawks, such as Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser, speaking out against the bond-buying extravaganza.
Doves like Atlanta's Dennis Lockhart and moderates like Kansas City's Esther George have expressed concerns about QE3 as well.
"I do think the growth of the Fed's balance sheet could have longer-term consequences that are worrisome. While I've supported these policy decisions to date, I acknowledge legitimate concerns," Lockhart said in a speech in Atlanta on Monday.
According to the minutes of the December Federal Open Market Committee (FOMC) meeting, several members "thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet."
If in fact sentiment within the FOMC is turning against QE3, then the easy money spigot that has helped fuel the stock market and other investments could be switched off sooner than most expected, which could have a sharp impact on the markets.
First, the central bank said it would increase the amount of quantitative easing by replacing Operation Twist, which ends Dec. 31, with outright purchases of long-dated Treasury bonds.
Under Operation Twist, every month the Fed sold $45 billion in short-term Treasury bonds and notes and bought $45 billion of long-term Treasury bonds in an effort to keep long-term interest rates low.
Because the Fed funded its purchase of long-term bonds with the sale of short-term bonds and notes, no new money was created.
However, outright purchases of long-term bonds will create new money-$45 billion every month-and, by concentrating its buying at the long end of the yield curve, the Fed should be able to keep long-term interest rates low.
The Fed also said it will continue to purchase $40 billion of mortgage-backed securities each month, creating a total of $85 billion in new money from these operations monthly.
That means QE4 is here.
Starting in January, the Fed will be more than doubling the amount of money it is pumping into the economy. Happy New Year!
Second, the Fed set unemployment and inflation "thresholds," instead of setting a date for when the central bank expects to be able to raise interest rates. What this means is that the Fed will not raise interest rates unless unemployment is 6.5% or less or inflation is more than 2.5%.
By setting thresholds where monetary policy might change, the Fed is attempting to improve its communications with the public.
And in an additional unprecedented move from the central bank, interest rate decisions will now be tied to the unemployment rate and inflation.
About a half hour into the release, the Dow Jones Industrial Average staged a near 65-point rally - but then lost that gain and ended down nearly 3 points at 13,245.45.
Here's a breakdown of the FOMC meeting outcome.
Today's FOMC Meeting: QE4As expected, the FOMC meeting ended with a replacement for Operation Twist, the expiring program introduced in 2011 of swapping short-term Treasuries for longer dated ones. The goal of Operation Twist was to lower long-term interest rates to stimulate the U.S. economy.
The new asset purchase program is an extended arm of the Fed's familiar quantitative easing programs, and has thus been dubbed QE4.
Now with QE3 and QE4 together, the Fed will purchase a whopping $85 billion a month of Treasury securities, stacking the Fed's portfolio with government-backed investments for an extended period.
The buying spree will remain intact until the unemployment rate falls below 6.5% and inflation projections remain no more than half a percentage point above 2% for two years out.
The Fed also left interest rates at rock-bottom historic lows near zero, as was also expected.
While these moves were widely expected, what wasn't expected was the Fed's forward-looking guidance.