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The mainstream media treated last week’s Federal Open Market Committee meeting as a non-story. But if we read between the lines, the Fed’s decision to endorse the status quo on monetary policy is alarming.
Some members of the committee, which set monetary policy, are ready to taper the central bank’s quantitative-easing program, while others believe the bond purchases should continue at the current rate of $85 billion a month. But the ultimate outcome of the latest meeting was more of the same.
You may be asking: “What are they waiting for?” The FOMC answered that question by saying it will maintain the current monetary policy “until the outlook for the labor market has improved substantially.”
Previously, Federal Reserve Chairman Ben Bernanke said the target for the U.S. unemployment rate is 6.5 percent. The jobless rate last month was 7.4 percent, down from 7.8 percent at the beginning of the year. So can we assume that QE will go on at the same pace for another year or more?
Reading Tea Leaves
Many investors now believe the Fed will begin tapering as soon as next month. But as we saw last week, Bernanke & Co. have remained characteristically tight-lipped about the timeline, and even the necessity, of tapering.
So how will investors know if, and when, to adjust their investment holdings in anticipation of the big move?
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| The well-being of the markets has become dependent on the vicissitudes of the men and women sitting in a Federal Reserve committee room. |
Unfortunately, we’re back to reading tea leaves again — watching the economic data for clues about what our monetary masters are thinking. But, apart from the unemployment rate, which economic reports specifically?
Inflation, supposedly the main gauge tracked by the Fed, has become largely irrelevant — there hasn’t been enough movement in the consumer price index or other inflation indexes for the Fed to even consider cutting back on the bond buying. So we must turn our attention back to employment. If the monthly payroll numbers start to swell, it will give the FOMC cover to begin pulling back on quantitative easing.
No New Jobs
Unfortunately, job creation has remained limp. And part of the reason is Obamacare, or the Affordable Care Act. The program may ultimately help millions of Americans who can’t afford quality health care. But for employers, it’s a disaster, and the administration knows it. That’s why Obama granted an exemption to corporations to delay implementation of the plan.
Until this albatross is removed from around the necks of U.S. employers, you can be sure hiring will remain weak. Instead, we will see more of the same — mediocre increases in monthly job creation. And a large share will come in the form of part-time jobs, which don’t require health-care coverage.
Red Flags from the Bond Market
Job creation remains subdued, and the FOMC just reinforced its commitment to the status quo. Yet bond investors seem convinced that policymakers who favor early QE tapering are going to win the battle.
As a result, the Treasury market has been growing jittery, and long-term yields have continued to rise. Just last week, the benchmark 10-year note closed just shy of 2.9 percent. The Fed governors can’t be too pleased to see that.
However, the bigger concern is not how closely the Fed is watching the bond market, but how closely the bond market is watching the Fed.
Our financial markets were once the envy of the civilized world. But now, they’ve been reduced to a quivering blob of Jell-O, sitting at the feet of the Fed like lap dogs begging for scraps from their masters. This is not the capitalist system that made our nation the revered model.
But you don’t have to be stymied by the Fed’s interference. People have been asking me, which way might the stock market move in the weeks or months ahead? To get my response, click here to see my newest post on Money and Market’s Facebook page.
Best wishes,
Douglas
