News Flash: Hell Freezes Over
Brian Hague, CFA
Let me admit up front that I was wrong – not once, but twice. (Don’t worry, it’s happened before.) I firmly believed that hell would freeze over before the current cabal of partisan posturers in Washington would set aside their gamesmanship to forge a compromise to avert the serial last-minute theatrics that have become this nation’s budget talks. I was equally convinced that the dovish Bernanke Fed would not begin tapering its quantitative easing program until a massive cold front hit the netherworld.
In a matter of days, I was proven wrong on both counts.
The House and Senate passed a deal – with surprisingly little drama – that would fund the government for two years, ensuring that we don’t face the continual battles that have become commonplace in funding the government. However, while the pact sets the total spending limit, it doesn’t allocate the funds, so there’s still ample room for partisan battles over who gets what. The GOP will want to boost defense spending; the Democrats will want to further extend unemployment benefits, which are set to expire at the end of this month.
And there’s still the looming battle over the debt ceiling, slated for February. So short-term government shutdowns have been averted, but the debt ceiling issue will remain, and will undoubtedly come up several times before this new budget compromise ends in 2015.
The GOP has vowed to fight further increases in the ceiling, while Senate Minority Leader McConnell said, “Every time the President asks us to raise the debt ceiling is a good time to try to achieve something important for the country.” I only wish I’d thought of that line back when I was receiving an allowance from my parents.
As for the Fed’s QE taper, the bond-buying program will be scaled back by $10 billion a month, split equally between Treasuries and agency mortgage-backed securities. But they’ll still be pumping $75 billion a month into the economy, so the effect will scarcely be felt.
Indeed, while stocks initially sold off on the announcement, they soon rebounded on the realization that this “taper lite” was little more than a token move; the Dow closed up nearly 300 points on the day of the announcement, reaching a new record. Bond yields reacted similarly, first rising, but then falling back to pre-announcement levels.
We can be reasonably sure that the even more dovish Janet Yellen, slated to lead the Fed beginning next month when Bernanke’s term expires, will not press to reduce stimulus further. Then again, I’ve been wrong twice this week …
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.
Copyright Graphic Volker Von Domarus/123RF 2013