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Rising Resistance To The Fed’s Easy Money; Time To Scale Back Bond Purchases?

April 17th, 2013

federal reserveGeorge Leong: The equities market continues to edge higher, with no apparent evidence of a pending letdown by investors despite the multiyear topping action in the S&P 500 (INDEXSP:.INX).

Once again, I say the rise and support of the stock market is clearly driven by the Federal Reserve’s loose monetary policy. This has been the story behind the upward move in the current bull market. It’s true the domestic and global economies have improved since the Great Recession in 2008, but in my view, it’s nowhere near the level to which we should see the market rise.

The problem that lies ahead is not only the inflated market and a sense of vulnerability as investors let their guard down, but the demand for goods and services could result in higher prices due to the excess in demand over supply. (The rich sure like the easy money. [Read “Higher Taxes: Who Cares? Not the Rich.”]) The end result could be inflation surfacing down the road, and we all know that means higher interest rates.

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So while Federal Reserve Chairman Ben Bernanke continues to buy $85.0 billion in bonds each month to drive down longer-term interest rates, enough is enough.

Witness that we are seeing more market watchers and Fed members coming out and expressing the need for the Federal Reserve to at least begin scaling back its bond purchases. The problem is that the Federal Reserve has already said it will not move on interest rates until the country’s unemployment rate falls to 6.5%, and this will not happen for a few years.

In an interview with CNBC, James Bullard, the president of the Federal Reserve Bank of St. Louis, suggested the Federal Reserve begin to reduce its bond purchases in what he termed as “small increments.” (Source: Belvedere, M.J.,“I’d Be Willing to Scale Back QE, Fed’s Bullard Says,” CNBC web site, April 9, 2013.)

As far as defining what could be a reasonable amount, Rick Rieder of BlackRock, Inc. expressed his wariness toward the size of the Federal Reserve’s bond-buying program.

Rieder suggested the degree of bond buying by the Fed has made the price of markets unrealistic; Rieder offered an amount of $40.0–$45.0 billion a month as a level the Federal Reserve should target. (Source: McCrum, D.,“Fed Warned to Rein In QE,” Financial Times, CNBC web site, April 9, 2013.)

Bernanke must look at the situation and the negative impact the continued flow of easy money can cause. I would say ease off on the throttle and turn on the cruise control.

This article is brought to you courtesy of George Leong from Profit Confidential.


NYSE:DIA, NYSE:SPY


 

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