QE will end this year after tapering off in June
I was on BNN’s Headline with Howard Green yesterday talking about the Fed’s QE program. I said that QE would be tapered and I believe it will likely end at the end of this year if the economy does not slip into recession. This is the timetable I felt was likely when I last spoke to BNN about QE a couple of months ago when commenting on Bill Gross’ view that QE would last through at least 2013.
See the video clip here.
Today we got confirmation that this view is accurate via the Fed minutes. Tim Duy has the details here.
On the BNN program I said that the QE program presented challenges from two sides. First, the Fed is using monetary policy to counteract a fiscal drag that is actually increasing. And so, while the jobs numbers over the past six months have been relatively robust in the US, the outlook is weakening due to the payroll tax increase and other fiscal cliff items in January and due to the sequester budget cuts last month. The full impact of this tightening has yet to be felt in the economic data and so the Fed is probably going to be withdrawing stimulus just as the economy feels the brunt of this. Earlier in the year, I had predicted a Q2 recession from the ill effects of the fiscal drag. However, I believe the housing market will keep consumer spending robust enough to pull the US economy through. But growth will be weak.
The other problem for the Fed with QE comes from the asset markets. It is clear that asset markets have become frothy. In the bond markets, there is considerable shift in private portfolio preferences already, to the point where high yield is at record low yields. Even PIMCO is switching to greater high yield exposure now. Moreover, Equity markets are at record highs due to multiple expansion despite the fact that earnings peaked a full year ago. BlackRock joins a chorus of companies urging the Fed to ease off the accelerator. This was the backdrop of the conversation we had yesterday at BNN. In my view, considerable damage has already been done. When this economic cycle turns down, we will see a spate of bad investments due to excess leverage and many investors will get caught out reaching for yield. The result will be a dearth of credit, exacerbating the credit cycle trough. Now clearly, it could be a lot worse. This is not a bubble of tech or housing proportions. Still, we are entering a period of economic weakness in a period of limited policy space and I believe the easy money policy at the Fed has made this worse.
My hope is that this economic pause is just a pause. If it is not, there will be lots of collateral damage, especially in housing.
- Median sale price of homes in Washington, D.C., hits record high | Washington Post – Today
- Obama administration foresees $943 million bailout for FHA | Reuters, Today
- The stealth bank bailout via leveraged FHA loans | Credit Writedowns – Dec
- FHA’s 30x leverage on mortgages is creating a new “subprime” market | Credit Writedowns – Aug
- Study Shows a Pattern of Risky Loans by F.H.A. – NYTimes, Dec
If this economy turns down in a nasty way and the housing market is compromised due to the goings on at the FHA and the credit markets are savaged due to whiplash from excess leverage, we will have no one to blame but ourselves. We thought easy money could ease the pain of the crisis and so we chose the path we are on, and we knew what the consequences would be if it didn’t work.
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