End of Federal Reserve Quantitative Easing

This week the Federal Reserve announced that it will most likely end bond purchases and end what has been called Quantitative Easing. The article authored by Jeff Cox is given. My comments on what this means follows. At the end is a section called Food For Thought.


Fed Minutes: QE likely to end with final $15B reduction in October, Jeff Cox, @JeffCoxCNBCcom

Federal Reserve officials indicated at their June meeting that the monthly bond-buying program could end sooner rather than later—with an October exit growing increasingly likely.

"Participants generally agreed that if incoming information continued to support its expectation of improvement in labor market conditions and a return of inflation toward its longer-run objective, it would be appropriate to complete asset purchases with a $15 billion reduction in the pace of purchases in order to avoid having the small, remaining level of purchases receive undue focus among investors," the minutes stated.

"If the economy progresses about as the Committee expects, warranting reductions in the pace of purchases at each upcoming meeting, this final reduction would occur following the October meeting."

That puts the end to quantitative easing at the front end of market expectations. This is the third QE cycle in a program that has stretched the central bank's balance sheet to $4.4 trillion.

Markets showed little reaction to the news, with stocks maintaining modest gains and government bond yields slightly higher, with the two-year note momentarily touching a three-year high.

"Everything was expected, I think the markets continue on," Ernie Cecilia, of Bryn Mawr Trust, told CNBC. "I don't think there was anything that troubling, certainly from a market perspective, or that surprising, from a market perspective."

The Fed at its June meeting voted to reduce the program another $10 billion to $35 billion, while keeping its target funds rate near zero.

Minutes indicated little taste for increasing rates ahead of schedule, with market expectations that the first hike probably won't come until mid-2015 despite improving economic data that has seen both unemployment and inflation at or near the Fed's target levels.

"The Committee again stated that it currently anticipated that it likely would be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continued to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remained well anchored," the minutes said.

There is an active debate over the timing of the Fed's first rate hike, with some arguing the central bank is prepared to move more quickly than markets might expect.
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Comment:

It is about time. The economy is stable to growing and these bond purchases are raising our national debt. It will be good to reduce our national debt by $4.4 Trillion once these bonds mature.

The real question is what does an investor do with this information? The answer is since this has never been done before, nobody really knows. If something happens it would most likely impact bond yields and stock prices. I believe that 3 scenarios exist:

1) Free market reign supreme and nothing really happens to bond yields or stock prices.
2) The economy is not ready for this move and economy starts to shrink lowering bond yields and stock prices go down due to money flow into bonds.
3) The demand for bonds goes down raising bond yields and stock prices go up due to money flow into bonds.

If the growth in the US Gross Domestic Product is higher than the 10 year US Treasury bond yield then scenario 3 makes sense. If the growth is the same or lower then scenario 1 & 2 make sense. It is important to relax, watch it unfold, and have a plan regardless of which scenario occurs.


Food For Thought

A Swiss hotel chef lost a finger in a meat-cutting machine and submitted a claim to his insurance company.  The company, expecting negligence, sent a claim adjuster to investigate.  The Adjuster tried the machine and also lost a finger.  The chef’s claim was approved.

An American teenager was in the hospital recovering from serious head wounds received from an on-coming train.  When asked how he received the injuries, he told police that he was simply, “trying to see how close he could get his head to a moving train before he was hit.”

A man walked into a Louisiana Circle-K, put a $20 bill on the counter, and asked for change.  When the clerk opened the cash drawer, the man pulled a gun and asked for all the cash in the register, which the clerk promptly provided.  The man took the cash from the clerk and fled, leaving the $20 bill on the counter.  The total amount of cash he got from the drawer was $15.  (If someone points a gun at you and then gives you money, has a crime been committed?)
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“The difference between stupidity and genius is that genius has its limits.”  Albert Einstein