Why IS The Fed Tapering?

profit-loss-riskMy Comments: Tapering is the term used to describe efforts by the Federal Reserve to slow down the monthly purchase of bonds. They have made these purchases for many months to help prop up the economy and keep interest rates low. It’s an important question for you if you have money in the markets because its going to stop sooner or later.

This article reveals the extent to which the Federal Reserve and other financial forces can bring pressure on the financial markets to move in the direction wanted by those who have an incentive to make it happen.

The article takes a while to the meat of the question, which is to help explain what those of us in the financial world know as Quantitative Easing or QE. Last June, there was an offhand remark by Ben Bernancke that pushed the markets into a tizzy for a few days. Now with Janet Yellon taking over as Chair of the Federal Reserve, there are real questions being asked about when and how the Fed will slow or stop the current QE which has served to prop up the economy for several years.

If you have money invested with me, it’s less of a threat since the programs we use all have the ability to shift gears on a daily basis and make money when the rest of civilization is losing money.

The three paragraphs below are copied from the middle of the article and are intended to help you decide if this is something you want to read about.

Jason Hamlin / Jan. 31, 2014

Manipulation of the gold price is a foregone conclusion. The question is: why is the Fed tapering? The official reason is that the recovery is now strong enough not to need the stimulus.

There are two problems with the official explanation. One is that the purpose of QE has always been to support the prices of the debt-related derivatives on the balance sheets of the banks too big to fail. The other is that the Fed has enough economists and statisticians to know that the recovery is a statistical artifact of deflating GDP with an understated measure of inflation. No other indicator, be it employment, labor force participation, real median family income, real retail sales, or new construction, indicates economic recovery. Moreover, if in fact the economy has been in recovery since June 2009, after 4.5 years of recovery it is now time for a new recession.

One possible explanation for the tapering is that the Fed has created enough new dollars with which to purchase the worst part of the banks’ balance sheet problems and transfer them to the Fed’s balance sheet, while in other ways enhancing the banks’ profits. With the job done, the Fed can slowly back off.

The problem with this explanation is that the liquidity that the Fed has created found its way into the stock and bond markets and into emerging economies. Curtailing the flow of liquidity crashes the markets, bringing on a new financial crisis.