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I didn't think it would happen, but Fed Chairman Ben Bernanke up and did "it" a few minutes ago.
He announced the "Fed taper" – the Fed will cut its bond buying by $10 billion a month (to $75 billion) beginning in January.
I think there are a few points to consider about Bernanke's move. I want talk briefly about those, and then highlight what this news of a Fed taper means for your money.
- Bernanke is basing his actions on new, lowered unemployment projections for 2014. The irony is killing me! For one thing, America is still roughly 1.5 million jobs below where it was in 2008. For another, so many people have dropped out of the workforce and stopped looking for jobs that the rate itself is being lowered, simply because there aren't as many people working. In other words, it's totally artificial.
- The so-called Bernanke "put" is still in effect. Bernanke is not removing stimulus; in fact, statements indicate that the Fed will take future spending/buying on an as needed basis. This says to me that Janet Yellen has the flexibility to increase it in mid-2014 – something I still believe is going to happen. Good thing, considering Bernanke said purchases are "not on a preset" course.
- The Fed left the target interest rate near zero and will leave it near zero as long as unemployment exceeds 6.5% and the inflationary outlook is no higher than 2.5%. That would be great… if it matched what consumers actually feel in their wallets. What they're feeling is between 7% and 9% inflation a year, according to the Real Price Index Project.
So why did the Fed taper come now?
Bernanke doesn't strike me as a "fall on his sword" kind of guy. I think what he's doing here is trying to clear the deck for Janet Yellen's tenure.
This makes sense when you think about it.
Deficits have been shrinking, which means the Fed has less maneuvering room because its purchases become disproportionately large.
At the same time, delivery risk is rising, because there is a growing shortage of Treasuries and Treasury-grade instruments. These serve as collateral for hundreds of billions of dollars in leveraged instruments, as well as more plain-vanilla margin accounts.
If the Fed keeps buying, for example, it runs the risk of forcing the markets to accept other instruments. Anecdotally, I've been hearing traders grumbling about this for weeks now. That, in turn, forces a global realignment as more people "short" already in short supply Treasuries. You can't rehypothecate what you don't have in the first place, especially if you don't have the underlying juice needed to collateralize the trade. This is really important, considering that the last data I saw suggested every dollar in the system was being rehypothecated up to 10 times.
And, finally, I've warned for a long time now that the single biggest danger to global financial markets is the Fed losing control. I think today's taper demonstrates that Bernanke feels he's at that point.
This, too, makes tremendous sense.
Almost every nation on the planet is fed up with the Fed and with U.S. monetary policy. Chief among them are our major trading partners and debt holders – like China, South Korea, and Japan. So the diplomatic pressure is likely intense.
At the same time, Wall Street and corporate America have made no bones about voicing their discontent. While the latter likes to think they're a big deal, it's the former – with their trillions of dollars in derivatives – that really is. Tapering right now potentially buys America some financial/economic capital that it desperately needs.
Here's what this means for your money…
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About the Author
Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.