Fed Says “No Way” to Tapering QEAt the Federal Reserve meeting this past Wednesday, Chairman Ben Bernanke confirmed the bond buying would continue as economic growth was only modest and jobs remain an issue.
In other words, the Federal Reserve is planning to keep the money-printing press in full operation.
Based on what was said, the central bank may not even look at reducing its bond purchases until sometime late in the fourth quarter or perhaps in 2014 as long as the economy and jobs growth struggle.
Bernanke wants it just right. I would rather see some cuts starting this year as a pre-emptive move against possible inflation and massive debt build-up from the easy money.
The advance second-quarter real gross domestic product (GDP) reading expanded at a surprising annualized 1.7%, according to the Bureau of Economic Analysis. I’m sure this number was noticed by the Federal Reserve, but again, Bernanke wants growth above two percent.
The upward push in the GDP growth was driven by a rise in personal consumption expenditures, exports, nonresidential fixed investments, private inventory investments, and residential investments. Increases in these areas helped to offset the decline in government spending. The Federal Reserve needs to watch this and avoid inflation.
The Federal Reserve chairman will also have to monitor the non-farm payrolls to be released today. The key ADP Employment Change was strong with the creation of 200,000 new jobs in July, well above the estimate of 175,000 by Briefing.com. In June, the ADP reading was 198,000, resulting in the creation of 195,000 new non-farm payrolls jobs. Based on this, we could see the July reading come in over 200,000, which would beat the Briefing.com estimate of 175,000. If the job creation breaks above 200,000, the unemployment rate could fall to 7.5%.
If the August non-farm payrolls are strong and the unemployment rate falls towards 7.2%, the Federal Reserve will then look at cutting, but not until the rate falls down towards 7.2%. This means that this won’t likely happen until sometime in the fourth quarter, I assume.
The Federal Reserve should also be concerned about the rapid rise in home prices and the potential of a mini-bubble if prices continue to accelerate higher. This was shown earlier in the week with home prices nationwide continuing to rise as the Case-Shiller 20-City Index surged 12.2% in May, the second straight month with 12%-plus gains. Buyers may be buying as longer-term mortgage rates begin to rise, but the rapid rise of prices is not what you want to see.
The remedy would be for the Federal Reserve to cut its bond buying and force up mortgage rates, thereby cooling off the housing market. This should be done by the year-end, yet I’m not convinced Bernanke will do so as he will also be leaving his post.
All I know is that we are heading toward some problems down the road. Though they will be delayed, the problems from the years of Bernanke policy will eventually appear.
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