By: Brian Hague, CFA
The much-anticipated FOMC meeting scheduled for September 17-18 concluded with a whimper, not a bang: the Fed decided not to begin tapering asset purchases. The central bank will continue to buy $85 billion worth of bonds a month, meaning its balance sheet will continue to swell beyond the $4 trillion threshold, more than four times the level of just five years ago.
The Chairman made some interesting comments following the announcement:
- The Fed cut its forecasts for economic growth: 2.0-2.3% this year, 2.9-3.1% next year, and 2.5-3.3% by 2016.
- “Most” of the improvement in the jobless rate is due to payroll gains (not true – most of the improvement is due to the continual slide in the labor force participation rate, to 30-year lows). He also stated that the central bank wouldn’t begin raising rates until the unemployment rate falls “well below” 6.5% (from the current 7.3%).
- Bernanke appeared to back off the likelihood of tapering this year, and intimated that it might be 2015 before tightening begins.
Bernanke also stated that “we can’t let market conditions dictate our policy actions.” Yet that’s precisely what the Bernanke Fed has done throughout his tenure as Chairman, a tendency he picked up from his predecessor. He said that it wasn’t the Fed’s intent to surprise the markets with today’s announcement, which appeared contrary to Fedspeak over the last two months. Yet the Dow, the S&P and the Russell 2000 soared to record highs, and the more bubble-prone NASDAQ hit a 13-year peak.
Asked about the impact of the tussle over who the next Fed Chair will be on the central bank’s image, Bernanke said, “I think the Federal Reserve has strong institutional credibility.” We’ll let history be the judge; the most accommodative policy in the history of the U.S. is unlikely to end well – and it’ll only become more accommodative under the front-runner to succeed him, Janet Yellen.
Finally, Bernanke punted the ball (or tossed the hot potato) back to the fiscal side, chiding Congress for its continual toying with the debt ceiling. With the September 30 deadline to raise the ceiling looming, and the GOP holding Obamacare hostage in the debate, he urged lawmakers to raise the ceiling further.
Little wonder: if Helicopter Ben intends to keep printing money, he needs Congress’ help.
Brian Hague has more than 26 years’ experience in financial institutions and the capital markets. His career has included work as an S&L examiner during the thrift crisis; trading futures for and valuing the mortgage derivatives portfolio of a $16 billion financial institution with offices on Wall Street; advising financial institutions regarding portfolio and risk management; serving as Chief Economist for a $50 billion financial institution; and serving as President/CEO of a national institutional brokerage and investment advisory firm for more than 15 years.
Brian has been a featured columnist and contributor for several trade publications, and has authored daily and weekly economic commentary, as well as two books for institutional investment managers. He has also been a frequent speaker and trainer at regional and national conferences. He holds a BA in Psychology and an MBA from Pittsburg (KS) State University, as well as the CFA charter and numerous FINRA securities licenses.
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