27 Sep 2013
Unwinding QE3 an impossible task for the Fed?
FXstreet.com (Barcelona) - Are we to simply take the Fed at their word about why they kept QE3 in effect? Or, might their be a more concerning reason for their choice not to taper?
There might be a scary reason for the Fed’s decision not to act in September
Many analysts have been out in the press speculating why the Fed decided not to begin their tapering program. Most cite what was said by Bernanke and friends when they announced their “no tapering” decision recently and give them the benefit of the doubt on the honesty of what they said. Others are questioning the FOMC’s competence evaluating the economy properly (meaning they believe the Fed is using inappropriate benchmarks to determine when the program should end) and exiting the program.
However, a third group exists that believes the Fed leaders know their stated benchmarks are bogus and are using them to cover up the fact that they have gotten themselves in over their heads. Under this theory, the Fed will not be able to find enough buyers of size to absorb all the inventory they would have to sell in order to aggressively wind down the program. Without mega buyers of our debt (like China, Russia and other buyers of sufficient scale), the Fed cannot dump their inventory without sending rates soaring and causing a domino effect of unintended consequences – a massive slowdown in the US and global economies being the main one.
So what’s the Fed to do? The answer very likely is "more of the same". Forget about unemployment falling to their desired level of 6% - QE3 is no longer having an effect on hiring and the Fed Heads know this (at least they better know it). But, the other stated bogey is inflation. As long as real inflation remains contained, the Fed will use it as a justification for their "no tapering" policy. If we see housing prices / rent equivalent prices soaring, food-related commodity prices ripping and wages rising strongly, the Fed will have to come up with some other excuse. Until then, they can keep up with their one-player pyramid scheme.
Bernanke has been out in the past explaining the Fed’s plan to mix the selling of their portfolio holdings with the natural running off of their holdings as they reach maturity. That seems great, but in order for it to happen, the Fed needs to stop buying new bonds – which is precisely what QE is all about. So, you see, their argument / plans are quite circular in nature. In other words, they truly may be painted into a corner and holding the brush. Their only hope may be for the rescue to come from the fiscal side of the equation and from the collective buffoonery and corruption in Washington - not very promising of a solution to say the least.
Technical messages regarding tapering
Technicians note that the first Fibonacci retracement (of the May to September rally in rates) line at 2.665% has already been breached – which makes the next downside target the 38.2% retracement line at 2.467%.
Elliott Wave technicians note that since wave “ii” lower - which took place from 3/8/13 to 5/1/13 – was a deep retracement of wave “i”, the current wave “iv” pullback should be relatively shallow – likely not exceeding a 38.2% retracement of wave “iii” (at 2.467% as noted above). Any break and close below 2.467% will be a warning sign that the bias is changing from generally rising rates (read tapering going to begin soon) to perpetually lower rates (meaning the Fed really is trapped and will keep pressing the gas pedal). If, on the other hand, support holds at 2.467%, the macro trend higher in rates will likely remain dominant and we can expect tapering to commence either later this year or some time in 2014.
There might be a scary reason for the Fed’s decision not to act in September
Many analysts have been out in the press speculating why the Fed decided not to begin their tapering program. Most cite what was said by Bernanke and friends when they announced their “no tapering” decision recently and give them the benefit of the doubt on the honesty of what they said. Others are questioning the FOMC’s competence evaluating the economy properly (meaning they believe the Fed is using inappropriate benchmarks to determine when the program should end) and exiting the program.
However, a third group exists that believes the Fed leaders know their stated benchmarks are bogus and are using them to cover up the fact that they have gotten themselves in over their heads. Under this theory, the Fed will not be able to find enough buyers of size to absorb all the inventory they would have to sell in order to aggressively wind down the program. Without mega buyers of our debt (like China, Russia and other buyers of sufficient scale), the Fed cannot dump their inventory without sending rates soaring and causing a domino effect of unintended consequences – a massive slowdown in the US and global economies being the main one.
So what’s the Fed to do? The answer very likely is "more of the same". Forget about unemployment falling to their desired level of 6% - QE3 is no longer having an effect on hiring and the Fed Heads know this (at least they better know it). But, the other stated bogey is inflation. As long as real inflation remains contained, the Fed will use it as a justification for their "no tapering" policy. If we see housing prices / rent equivalent prices soaring, food-related commodity prices ripping and wages rising strongly, the Fed will have to come up with some other excuse. Until then, they can keep up with their one-player pyramid scheme.
Bernanke has been out in the past explaining the Fed’s plan to mix the selling of their portfolio holdings with the natural running off of their holdings as they reach maturity. That seems great, but in order for it to happen, the Fed needs to stop buying new bonds – which is precisely what QE is all about. So, you see, their argument / plans are quite circular in nature. In other words, they truly may be painted into a corner and holding the brush. Their only hope may be for the rescue to come from the fiscal side of the equation and from the collective buffoonery and corruption in Washington - not very promising of a solution to say the least.
Technical messages regarding tapering
Technicians note that the first Fibonacci retracement (of the May to September rally in rates) line at 2.665% has already been breached – which makes the next downside target the 38.2% retracement line at 2.467%.
Elliott Wave technicians note that since wave “ii” lower - which took place from 3/8/13 to 5/1/13 – was a deep retracement of wave “i”, the current wave “iv” pullback should be relatively shallow – likely not exceeding a 38.2% retracement of wave “iii” (at 2.467% as noted above). Any break and close below 2.467% will be a warning sign that the bias is changing from generally rising rates (read tapering going to begin soon) to perpetually lower rates (meaning the Fed really is trapped and will keep pressing the gas pedal). If, on the other hand, support holds at 2.467%, the macro trend higher in rates will likely remain dominant and we can expect tapering to commence either later this year or some time in 2014.