The Fed’s Failed Strategy Is Dying A Slow Death

printing QEMike Larson: The shift in expectations for the Federal Reserve to taper its quantitative-easing program has been nothing short of breathtaking over the past several weeks.

In the wake of the Fed’s surprise September decision to postpone the start of that process, Wall Street’s short-term thinkers did a complete 180.

They went from predicting a near-immediate start to tapering to predicting that tapering wouldn’t start until well into 2014, perhaps as late as June.

One market watcher at Deutsche Bank went so far as to literally suggest the Fed should ask itself: “Why bother to taper at all?”

Me? I’ve tried for several months to take a longer-term view and not be swayed by every market gyration. I’ve also tried to be as crystal clear as I can about something very important: The ongoing rounds of QE have been positively useless when it comes to bolstering the “real” economy.

While there was no clear signal on when the Fed might scale back QE, the post-meeting statement was more bullish on the economy than some were expecting.
While there was no clear signal on when the Fed might scale back QE, the post-meeting statement was more bullish on the economy than some were expecting.

The Fed, over several years and a few trillion dollars of bond buying, has failed to deliver GDP growth of 3 percent, 4 percent, 5 percent or more, growth that would represent a strong recovery. The Fed has failed to spur companies to add 300,000 or 400,000 jobs a month. And the Fed has failed to trigger huge growth in durable-goods orders, lift consumer sentiment or give us 1990s-style manufacturing or service-sector strength.

Instead, the economy has gradually healed over time on its own. It isn’t growing at a brisk pace, but it isn’t shrinking either. There’s nothing out there to justify the lowest level of interest rates in history, for the longest period of time in history. Nor is there anything going on to justify the same kind of massive money printing we saw in the depths of the Great Recession in 2008.

So what did QE “accomplish”?

It managed to inflate the biggest bond bubble in the history of the world. That sucked in millions of investors, who collectively shoveled roughly $1.4 trillion into bond mutual funds and ETFs chasing performance — just like they poured money into tech stocks in the late 1990s.

The problem is that bubbles and bubble-inducing policies can’t continue forever. They eventually reach a point where they collapse under their own weight. I believe we saw the first phase of that collapse this spring, and now, the second phase of that collapse may be about to get under way.

That brings me to this week’s Fed meeting. As expected, the central bank on Wednesday did nothing in terms of changing policy — it maintained the $85-billion-a-month pace of asset purchases. And, as expected, the Fed continued to talk about maintaining relatively easy policy.

But I believe the post-meeting statement was actually more bullish on the economy than some were expecting. The Fed said that “the Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall.” And also that “the Committee sees the improvement in economic activity and labor market conditions since it began its asset-purchase program as consistent with growing underlying strength in the broader economy.”

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