Fed Seen Slowing Stimulus With QE Cut by End of This Year
Comment of the Day

May 01 2013

Commentary by David Fuller

Fed Seen Slowing Stimulus With QE Cut by End of This Year

Here is are two sections from this topical item from Bloomberg
Withdrawing accommodation after an open-ended program of bond buying is “unprecedented territory” for the central bank, said LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York . Cutting purchases by about a third would allow the Fed to gauge the reaction of the economy and investors. If the economy strengthens, the Fed could keep tapering purchases, he said. If   interest rates   rise and threaten growth, policy makers could renew easing.

“You want to see how the market is going to digest a cut in purchases so you want to do it in a way that minimizes the disruption,” said LaVorgna, who was among economists in the Bloomberg survey.

The Fed began purchasing $40 billion a month of mortgage- backed securities in September and announced in December additional purchases of $45 billion a month of   Treasury securities .

The FOMC in a statement after its last meeting on March 20 reiterated a pledge to keep buying bonds until the labor market improves “substantially.” Bernanke said at a press conference the same day that policy makers are considering a proposal to “appropriately calibrate” bond purchases based on the performance of the economy, including the job market.


St. Louis Fed President   James Bullard   has proposed the Fed alter purchases by $10 billion to $15 billion per meeting depending on the outlook for the economy. Such an approach may “put too much precision on it,” Gapen said.

“I can't tell you there's a meaningful economic difference between $85 billion a month and $70 billion a month,” said Gapen, a former Fed economist.

Fed Vice Chairman   Janet Yellen   and New York Fed President William C. Dudley have backed the idea of adjusting purchases, without providing an estimate of how much to shrink or enlarge them at each step.

Calibrating bond buying will “provide the public with information regarding the committee's intentions and should reduce the risk of misunderstanding and market disruption as the conclusion of the program draws closer,” Yellen said last month in a speech in Washington.

David Fuller's view In other words, it does not get better than this in terms of monetary policy accommodation from the Fed. Logically, as this message sinks in, investors will begin to conclude that it can only get worse.

No wonder Mr Bernanke wants to retire at the end of his current term in January 2014! I mean no disrespect – Mr Bernanke is a nice, mild mannered gentleman who has experienced the fun part of ‘saving the world', while Rouriel Noubini said it could not be done. Plenty of others agreed with him.

The task of unwinding QE, which involves removing the mother of all punch bowls, is likely to be unsettling.

I have mentioned this on several occasions in recent weeks. While we do not know the extent to which it will impact markets, the uncertainty is very likely to cause anything from a correction or two, to a cyclical bear market.

One may wish to exit some overvalued and overstretched stocks before that downturn. However, I have also said that the next cyclical bear market should be considerably smaller than the 2000-2001 and 2007-2008 slumps during the secular valuation contraction phase which I believe is now in its latter stages. Bear markets are always stressful but I also maintain that the next one will be an excellent buying opportunity.

Lastly, I maintain that the next secular bull market, led by the accelerating rate of technological innovation, will be apparent before the end of this decade.

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