Federal Reserve . Is The Party Over June 27, 2011
30th of June 2011 the Federal Reserve will have completed its asset purchase program, bringing its second round of Quantitative Easing to an end. The Federal Reserve officials have been warning for months that the controversial $600 billion bond-buying program they initiated last year wouldn't be a home run for an ailing U.S. economy.
The main goals of , was to maintain inflation levels or at best avoid a Japan-style deflation, also help stir the economy by holding down long-term interest rates. The Feds effort was meant to create an economic environment favorable for the creation of more Jobs.
So far, deflation worries have been put to rest but the jobs growth have been nothing impressive to write home about; after a spurt jobs growth has been on the decline. The economy report has also shown signs of a slowdown, and the financial-market impact has been a mixed bag tongs and roses.
As the Global economies dictate prices of oil and other commodities, with demand outpacing supply the prices are expected to remain on an upward trend for a very long time to come. This is no good news for US consumers and the US economy in general which has grown at a 2% annual rate in the first half of the year, the slowest six-months since the recovery started.
The QE2 program has been a controversial program. Critics say it’s the mean reason for inflation around the world, resulting in all sorts of problems like high food and commodities prices.
To be fair, some of this criticism is likely overstated. The year 2011 so far has seen the rise in uncertainty around the world, the political turmoil in the Middle East and North Africa, the natural disasters in Japan, US and around the world have all helped in pushing the price of Oil above $100 a barrel
Fed officials say commodities- price inflation is driven primarily by global demand, particularly from fast-growing economies like China but the QE’s have helped get us to the present situation. Under the Fed's program, it will have purchased $600 billion of U.S. Treasury securities between November and June. In the process, it is pumping money into the financial system. Fed officials argue that by reducing the supply of long-term bonds in the hands of private investors, the purchases helped to hold down long-term interest rates, easing financial conditions.
Fed officials estimate the impact of the purchases is equivalent to a 0.75-percentage-point cut in the federal-funds rate, a short-term interest rate they control and which influences other borrowing costs throughout the economy. The Feds have reached a point where an additional QE would be pushing the limit; they cannot reduce the interest rate further as it is near zero. In normal times, Fed policies work through interest-sensitive sectors such as housing. The policies benefit housing less now because the sector is already so burdened by debt and the worst is yet to come. As long as the financial sector keeps play cat and mouse with the shadow inventory the housing market will never bottom out and start making a recovering. That’s why they are not lending even at record level interest rates because they better than anyone understand that housing prices are still on the decline. Credit for to the housing sector today makes no senses because in a year the same property would defiantly have lost about 40% of its market value, which would bring us back to the main reason the sector is in trouble today. All this is making it possible for new construction to grow. Since last August, the annual pace of starts on new home construction is down from more than 600,000 to 560,000 and home prices, as measured by the S&P/Case-Shiller home price index, are down another 3%.
Post QE2
There has been much speculation about what will happen in the markets—stock, bond, as well as commodities—when the Fed ends QE2 and the economy is left to stand on its own without any stimulus.
The party is over and the economy is better off because of the program but moving forward additional QE would only procrastinate the fundamental problems of the economy that need to be addressed.
Bond yields: Bond guru Bill Gross, who manages the world's largest mutual fund, PIMCO Total Return, is forecasting a spike in treasury yields. Gross has sold off all of the T-bills in his flagship fund because of his concerns about the end of QE2. Gross writes, "Bond yields and stock prices are resting on an artificial foundation of QE II credit." Who will buy T-Bills when the Feds don’t buy it is the question on everyone’s mind, and the reaction the market would have. Expect yields to spurt in the coming months they are presently at historical lows.
Stocks: The S&P 500 has risen about 6 percent since the Fed launched QE2, but has been on a decline for the month of June. Uncertainty with the Impact of QE2 is a reason the market is on a defense, Investors will start looking for signs in the coming months; if yields start heading up, that could be a negative for the stock market. Higher yields are generally associated with an economic recovery, but a quick jump could impact stocks negatively. Look for stocks to head back to Pre QE 2 levels before it begins to head up towards the end of the year.
Commodities: Commodities have been on the rise for the greater part of the year as they react to the Feds easing, injecting cash into the financial system. Expect commodities to start heading south for different reasons. For example Gold should continue its run but fears of a Greece default and other EU nations to follow. The dollar will start making a strong run against the euro which will slow the Gold factor significantly.
High food prices have been the story in emerging markets like Africa, China, Brazil, and India. QE2 has been partly blamed for higher food prices; there is also worry that the end of QE2 may not be enough to slow down inflation globally. A stronger dollar would benefit mostly global economies; the dollar remains the world's reserve currency—meaning that many commodities throughout the world are priced in dollars. A stronger dollar could help slow some inflationary pressures throughout the world. Commodities should be on a downward tread but would be on the rise as the year comes to an end.
US Economy; As QE2 ends at the end of June, the trickle-down effect of stocks, commodities, bonds is going to shape the economy in the near months, if the situation starts escalating expect the Feds to come up with QE3 they may not call it that but some type of easing will come.
Seven Ezumba seven@reinventrebuild.com < back
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