Nearly two months after it announced that it will begin to taper off its massive $85 billion per month bond-buying program sometime next year, the Federal Reserve ended its two-day policy meeting without confirming as to when it plans to wind down its stimulus efforts. It did, however, somewhat revise its policy statement.
The nation’s central bank wrapped up the meeting by summarizing the recent 1.7 percent economic growth as “modest,” a change from last month’s characterization of the recovery as “moderate.” That’s the only thing investors got from the meeting, including one consistent dissenting opinion of a board governor.
“The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction,” the Federal Reserve said in its statement. “Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
Not all members concurred with the measure. Esther L. George was the only individual to vote against the present policy over fears of long-term inflation and heightened risks of future economic and financial imbalances – she has been routinely voting this way for the past year.
In the statement, the Fed noted that present inflation is below its two percent objective and it could hinder economic growth, but it believes that it will reach the two percent figure in the medium-term.
Following the meeting, there were no new details regarding when the central bank could possibly end its stimulus initiative – if at all. Fed Chairman Ben Bernanke said at a press conference in June that it could continue its current monetary policy in the future, but only if the data welcomed it. Critics of the Fed, meanwhile, say that it will most likely not end the practice because the markets and investors rely so heavily on stimulus dollars.
“Yet the mere and obvious mention that tapering was even possible, combined with the chairman’s fairly sunny disposition (perhaps caused by the realization that the real mess will likely be his successor’s problem to clean up), was enough to convince the market that the post-QE world was at hand. This conclusion is wrong,” wrote Peter Schiff, president of Euro Pacific Capital, in an op-ed piece in late June.
“Of course, when the Fed is forced to make this concession, it should be obvious to a critical mass that the recovery is a sham. Investors will realize that years of QE have only exacerbated the problems it was meant to solve. When the grim reality of QE infinity sets in, the dollar will drop, gold will climb, and the real crash will finally be upon us. Buckle up.”
This sentiment is also shared by other well-known officials. David Stockman, former budget chief in the Reagan administration, told outlets for about a month that the Fed could never stop its QE due to the fact that if it were to close up shop for even a month then the market would collapse and everyone would realize that it can’t do without Fed stimulus.
Furthermore, Esther George was correct in her fears. All charts point to higher price inflation and the Fed’s own M2 money supply data suggests a substantial increase. On top of high debt, budget deficits and a weakened dollar, the situation has the capacity of getting a whole lot worse.