19 Sep The Fed Chooses Enabling over Tapering
The first thing I will say is that I am not one of those “the Fed is the devil” type of people. There are legitimate criticisms of the Federal Reserve out there, and there are irrational ones. I am critical of present monetary policy, but I am not critical of the motives of Chairman Bernanke, who I believe to be consistently applying the principles he sadly believes in. With that said, the Fed’s actions yesterday were appalling even for this Fed.
In taking three months to flat-out tell the market they were going to begin “tapering” their bond-buying program, commonly called “QE3” (quantitative easing, round 3), the Fed built into the market the expectation that at least some of the excessively easy monetary policy they were providing would begin to unwind. Then, to the shock of every single market participant and analyst you will find, they announced yesterday NO “tapering”, and provided the most dovish overtone to their present mood we have heard from them yet.
Why? Why would the Fed know that the capital markets were fully prepared to absorb a $10 billion tapering of this bond-buying, and then not even do that? It is not merely my opinion that at some point they have to stop this – it is their opinion! Chairman Bernanke has said so repeatedly. This was a golden opportunity to begin some very, very mild restoration of sound monetary policy. So why would they do this?
Simply put: Their coddling of the housing market is dumbfounding. I know many investors and investment professionals were celebrating yesterday’s action, but I promise you it was a bad day. It is a pure housing market infatuation. I would assume there is extreme pressure from Fannie Mae and related policymakers to sustain the steroids the Fed had injected into the housing market prior to the summer of 2013. The mere expectation of modestly higher rates caused enough of a slowdown to this momentum that I believe the Fed chickened out. This is very disappointing, because the Fed knows that the day of reckoning has to come. No “housing recovery” can be considered real when it can not even sustain the modest tapering of a bizarre Fed bond-buying program.
I am not one who believes QE3 is going to lead to hyper-inflation – it is not. Worse, QE3 is simply worthless, it is building excess reserves in the banking system that serve as no catalyst to economic growth. The tool the Fed is holding on to for dear life is whatever will work to provide the appearance of health and momentum in the housing market. So as we sit here on the five year anniversary of ground zero to the biggest financial crisis since the Great Depression, one caused by a cult of housing market obsessiveness, I have to express extreme disappointment that the Fed appears to be clinging to the same misguided thinking.