Bernanke & Co. are so utterly terrified of the market’s reaction to a Fed tapering process — and so gutless when it comes to facing the consequences — they’ve chickened out and kicked the can down the road.
Specifically, the Fed said it will:
“Closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.”
What does this mumbo-jumbo really mean?
That the Fed just missed the last opportunity it had to exit from the disastrous QE trap without causing utter chaos in the bond market.
You see, the market was prepped for a taper, and the time to act was now. Instead, the Fed punted, saying it will continue its $85 billion-per-month pace of buying Treasuries and Mortgage Backed Securities (MBS) for a bit longer.
This merely creates an even shakier bond bubble and drags the Fed deeper into the trap of its own making.
So what happens next?
First, the Fed will have to taper very soon anyway. All the forces I’ve talked about mandate that to occur. Those include a 6-barreled shotgun aimed at the Fed with the triggers already being pulled …
- Increasing market dislocations in the Treasury and mortgage backed securities markets.
- More hard-hitting and reliable research showing that QE is relatively useless when it comes to influencing the real economy.
- Some improvement in the global economy, helping to drive global interest rates higher — not to mention hawkish rate talk by foreign central banks, including the Bank of England just this morning.
- The long-term unsustainability of below-inflation interest rates. (See “The Chart of the Century.”)
- The withdrawal of more money from the bond market by both foreign and domestic investors (See “Beware of the Denial That’s Gripping Wall Street.”)
- The historical pattern — dating back a half century – for the Fed to follow rather than lead the bond market (“Forget What the Fed Says and Listen to the Bond Market.”
Second, every major firm on Wall Street expected at least $10 billion in tapering to begin today, and now those firms will be lulled back to sleep by the Fed’s failure to act.
After an upcoming Fed meeting, though, possibly as soon as October or December — it will be a total shock, pummeling a market that won’t be prepared at all for the move!
Third, what does it say about the underlying health of the economy when even a token taper of a few billion bucks had to be taken off the table? It says that things just aren’t as rosy as many analysts and investors believe.
So bottom line? The opportunity to profit from future interest rate disruptions and market volatility just skyrocketed. So stay tuned for more important updates!
Until next time,