Thursday, November 14, 2013

Yellen, QE, Tapering, and Fed Policy

No need to retrace the approximately 56 trillion articles written recently about QE, tapering, Fed policy changes or incoming Fed Chair Janet Yellen.  If you are not already somewhat familiar with these topics then you are not going to be interested in this commentary.  But if you are interested then I am going tell you what is going to happen with Fed policy from here.
Ready?  Here goes.
QE will be being tapered (wound down and ended) during the first part of 2014.  Monetary policy will not be tightened, any.  The great lumbering ship that is the U.S. economy will not get a course change, only a rearrangement of the deck chairs.  QE will be gone as a policy name, but the easy money policy will continue in disguise and with a sexy new moniker.  A sort of  “the king is dead, long live the king” or “a rose by any other name …” type of situation.
My advice is to turn off the audio on your fed monitor and just observe the video.  You will not see any substantive change.
Why is this? 
  The Fed still sees strong deflationary pressures and considers those to be a far greater risk than any near term risk of inflation.  The Fed has been cooking high powered liquidity with enthusiasm Heisenberg could appreciate but the customers (banks) are hoarding  not using. Money supply and velocity of turnover are not responding.  Fed politburo members fervently believe easy money is the only real weapon they have to oppose deflationary pressures  until economic growth becomes robust enough to bring strong  job growth and restore optimism in the populace (animal spirits in economic jargon).

Nothing is going to change except the lipstick on the pig.  The Fed is trapped.  Congress collective head is shoved up its collective fundament. The administration favors anti-growth social policies and punitive measures over pro-growth incentives.
 For a positive note, remember we don’t belong to the EU.

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