2013-09-20

Taper Prediction Miss; Fed in a Box

I predicted a $15 billion reduction in Treasury purchases and a $5 billion increase in MBS purchases.

I didn't make the prediction based on a strong economy, but upon the size of the U.S. federal deficit.

The Fed made a huge mistake by not tapering because interest rates will not go down. QE3 remains a failed policy (see: Why Is The Fed Tapering? Did They Realize QE3 Is A Failure?). Now, when the Fed does announce the taper, it will create a repeat of the May spike in interest rates, this time from a higher level. The Fed had a "freebee" this week; they could have tapered by only $5 billion and seen a positive response from the market. Instead, they wasted four months of market preparation.

Furthermore, the U.S. budget deficit still isn't growing. Unless the Fed believes the economy is in recession, they are going to start running into major problems as federal deficits decline. The Fed well believe a recession is coming or already underway. Remember how concerned they are about perceptions. The GDP growth forecasts may be pure BS designed to combat bad juju.

QE3 has made no dent in interest rates. Rates were lower before QE3 was announced. The Fed's decision not to taper will not change the inevitable course of the markets, what it does is put the Fed in a more difficult position.

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