Why I Believe the Fed Made the Wrong DecisionDisbelief—that was my initial reaction to the Federal Reserve’s surprise decision to refrain from scaling back its bond purchases at its meeting last Wednesday.
Heck, I was expecting Bernanke to reduce the central bank’s bond buying down to around $75.0 billion a month, to see how the economy and stock market reacted and re-evaluate its tapering plan from there.
But stimulus-happy Bernanke pulled a fast one on us and surprised us with his inaction to stop the flow of easy money to stocks. He wants people to make money on the stock market and continue to spend in order to get the country’s economic engine going—but his plan isn’t working.
Trillions of dollars have been pumped into the system as the Federal Reserve’s balance sheet continues to weaken; even still, Bernanke had to downgrade his assessment for the country’s gross domestic product (GDP) growth for 2013 and 2014.
Something is clearly not working. The flow of easy money is not going according to plan. And that’s why the Federal Reserve really should have begun taking a bit off the table at this point.
Across the pond, the Bank of England decided to pull back on any additional stimulus, and its economy was growing at an even lower rate than that of the United States when it made this decision. But that’s because Mark Carney, the head of the Bank of England and the former head of the Bank of Canada, realizes you cannot go on printing easy money forever.
Obviously, Bernanke and the Federal Reserve disagree with Carney’s conclusion, and as a result, they are creating a situation of massive debt and high risk that could backfire sometime in the future, especially when interest rates begin to edge higher. The Federal Reserve just doesn’t get it, and the country could pay dearly for its ineptitude as we move forward.
And worst of all, with the withdrawal of Lawrence Summers as a nominee for the next Federal Reserve chairman, it looks like current Federal Reserve Vice Chairman Janet Yellen, who is stimulus-positive, may be the replacement for Bernanke. It’s expected that she will maintain Bernanke’s policies.
So that means more stimulus and easy money propping up stocks, which will continue to be dependent on the money flow. (And they really are dependent on it; just look at the record highs reached when investors knew the monetary policy would continue unabated, or the lows reached after the Fed’s June meeting and rumors of tapering began to circulate.) The fact the economy continues to be sluggish and corporate America can’t generate revenue growth despite all of the help is a red flag—and if I were you, I’d heed its warning.
Readers, I’d suggest you start looking at an exit strategy should the stock market continue to edge higher, as the support of easy money is not exactly that concrete. If the Federal Reserve pulls out its monetary support later, you might want to watch out because stocks could come crashing down.
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