I know some traders hope that the Fed is going to pass on the final leg of winding down the QE program at next week’s FOMC meeting. They think that Bullard’s “the Fed should consider delaying the taper” was more than just an off handed remark by a Fed Governor in the midst of a market meltdown. They actually think that the Fed might panic and not pull the trigger on this last tapering.
Well, I have news for them. It ain’t going to happen. The Fed is going to go through with the taper – whether the market likes it or not.
Why I am so sure? And couldn’t my certainty be the best signal that it very well might not happen? Maybe, but I think the odds are highly unlikely.
The Fed realizes that the QE program is a highly politicized, increasingly ineffective program. It might have been needed in 2008, but lately all it has been doing is exacerbating the inequality problem. It has been steering too much money towards Wall Street, with not nearly enough trickling down to Main Street.
Last week after Bullard’s comments, Yellen had the perfect opportunity to solidify the idea that the Fed was going to consider leaving the QE program running for one more month. It was Friday, and although the stock market was in the midst of rallying, it was still by no means a surety that things had stabilized. But what did Yellen talk about? It sure wasn’t QE. In a strange unprecedented move, Yellen spoke extensively about the problems of inequality. This was way outside the norm of what a Fed Chairperson usually pontificates about.
The previous Fed Chairman Ben Bernanke’s expertise was the Great Depression. This knowledge proved valuable as his skills were needed to help navigate through the problems that arose with the unwinding of the credit bubble.
Yellen’s raison d’être is inequality. She is kind of like the Elizabeth Warren of the FOMC. Fighting for the little guy.
That is why under her leadership, the Fed is going to find different ways to administer monetary easing. They aren’t going to shovel money out to Wall Street and hope it somehow makes its way to the average Joe anymore. No, they are going to find new creative methods of getting the money into the hands of the average American.
I don’t know how they are going to do it. They might not even know yet themselves. But they aren’t going to blindly continue engaging in more and more QE. Yes, maybe in a really dire situation I could see them doing traditional QE, but only along with some other new programs.
Make no mistake about it – this is a different Fed with a different Chairperson. Just like Bernanke was forced to engage in new inventive programs to stave off the credit crisis, this Fed will be forced (or maybe choose is a better word) to engage in new inventive programs to help fight the inequality problem.
Now you might argue that this should not be the role of the Federal Reserve. And you very well might be right. But it isn’t going to matter. Our goal as traders is not to worry about what should be, but instead to focus on what is.
This Fed is going to make inequality a focus. Yellen has already told you that. They are going to try different programs instead of relying on the old ones.
So when you hear all the shrill cries about how the Fed is going to pause the tapering, ignore them. This is one of the most dovish Feds ever assembled, but their main tool of easing will not be Quantitative Easing in the form that Bernanke instituted. They want that program off the books – the sooner the better.
I have not even discussed the fact that the US economy is actually chugging along nicely. Employment is at the high for this cycle and seems to be improving. Although inflation is not running as high as the Fed would like, a lot of those problems are the result of the global economic turndown. The idea that the Fed should pause their tapering because of the small backup in risk assets is ridiculous.
Not only that, the Fed has warned repeatedly that risk was not being priced correctly. Yellen has been worried that the frothy markets were sowing the seeds for another financial crisis. The Fed most likely welcomed the recent decline in risk assets.
The Fed is going to wind down QE at next week’s FOMC meeting. They are closing the books on this chapter of monetary policy. They might find other ways to be dovish, but it isn’t going to be by pausing the taper.