Federal Reserve System news has had investors riveted lately. Many eyes around the world are fixed on the central banking institution as it prepares to undergo a change of leadership. As Janet Yellen, the candidate to succeed Bernanke, sits in the wings, there are big issues facing the institution which have investors, banks, and nations around the world eyeing its every move. As we begin to sail the murky financial waters of a globally integrated economic system one of the topics commanding world-wide attention is the “Fed taper.” With the actions that the Federal Reserve System has showed us so far however, when it comes to quantitative easing (“QE”) the Fed’s actions seem to suggest that their plan can be summed up in a famous movie quote, “To infinity and beyond!”
The Fed released minutes Wednesday of a late October policy meeting in which it discussed the position it should take regarding the taper as it moves forward. There have been constant rumors, regarding the Federal Reserve System’s possible change of direction from “making it rain” easy money, to scaling back and “tapering.” Discussions like this have taken place since the second round of QE back in Nov. of 2010. The Fed itself has repeatedly attempted to pass off the idea that the rounds of QE were not meant to be indefinite and each round was painted as if it could be the final one. However, the “easing” has marched steadily along at an ever-increasing pace regardless of what is said by Fed representatives about wanting to slow or end it.
These latest reports coming out of the Fed minutes of last month’s policy meetings suggest, once again, the notion that the Fed could begin tapering in one of its upcoming meetings. The tone of the minutes suggest that the central bank might actually be serious about beginning to address the effects of an extended policy of cheap money and artificially suppressed interest rates.
However, consider the effects of a possible change in the current Treasury bond and MBO (Mortgaged Backed Obligation) purchasing actions of the bank. Much of the “recovery” witnessed since the meltdown nearly seven years ago has been a result of the cheap money and purchasing actions which have kept interest rates close to zero recently. The potential results of a change in this policy seem to keep the Federal Reserve System’s default position one that will continue QE’s not only to infinity, but far beyond any rational point.
At present the Federal Reserve System is still purchasing Treasury Bonds and bad Mortgages to the tune of $85 Billion per month. Some economists believe that the with the tone of these October policy minutes, we can expect to see some change in the Fed’s position early in 2014. It could be true, there might be some temporary “taper” coming up. After all, like the well known disclaimer found printed somewhere on every prospectus, “past performance is no guarantee of future results.” However, the entire financial advising and investing community heavily analyze past performance, and combine them with relevant data, in order to predict possible future outcomes.
So taking into consideration the banks past performance, along with the precarious economic tight-rope on which the US and the world are walking, don’t be surprised if the Federal Reserve System continues to build its policy on QE directly on the famous movie line, “To infinity and beyond!”
By Daniel Worku