Oct 30, 2014 Posted by AGA Editor

End of Quantitative Easing = More Stimulus?

The Quantitative Easing (QE) reign has come to an end.

But there is a problem.

Where do we go from here? The Fed has been lacking in transparency (big surprise) in regards to its monetary policy. There have been hints of a coming interest-rate hike, but when? And by how much?

While the Fed stated for the first time that it could lift interest rates sooner than the market anticipates if the economy grows faster than the bank expects, it was still quick to hedge that slower growth could push back the timing of the first interest-rate hike.

Thanks, Yellen & Co. That’s about as clear as mud. There is only one thing we know for fact to expect from the Fed: Uncertainty. And if there is one thing the market doesn’t like, it’s uncertainty.

Uncertainty sense to be the New Normal

Ben Bernanke, the previous Fed chair, had clear targets you could gauge — 6% unemployment and 2% inflation. Until we reached, or came close to, those guidelines we knew the Fed wasn’t going to tighten its monetary policy. That’s because the Fed has a dual mandate to promote employment and tame inflation, so those two targets fit right into their realm.

The other tall tasks of the world — economy, markets, debt, etc. — rely on our politics, which isn’t saying much.

That puts Janet Yellen in a tough spot.

While she can’t publicly mention this, she knows rates can’t rise by any meaningful amount because it would cripple our government and slow the economy — two things that aren’t in their mandate, but clearly aren’t good for the market.

As we get closer to an inevitable rate rise, and then to dealing with the bloated balance sheet, we’re going to see a significant amount of uncertainty that will keep these markets volatile.

Are you awake Yet?