Thinking of Life Without QE - Ahead of Wall Street
May 14 2013 - 5:03AM
Zacks
Tuesday, May 14,
2013
Comments from Philly Fed President Charles Plosser would likely
keep the spotlight on the Fed’s QE program in today's trading
session. Mr. Plosser is part of the hawks on the FOMC that have
been arguing for scaling back the pace of bond purchases before
stopping the program altogether. The future of the QE program has
been in the headlines since the weekend article in the Wall Street
Journal that discussed the Fed’s plans to map an exit strategy. Mr.
Plosser favors the reductions in bond purchases to take effect now,
ahead of the program’s end at a future date.
Is this a trial balloon by the Fed
to prepare the market for the eventual changes to the program or
the wishes of FOMC hawks who have long been arguing along these
lines?
Hard to tell at this stage. But
the reality is that the Bernanke Fed justifiably takes pride in its
transparency and unambiguous communications. And they would take
their time in preparing investors for the long-anticipated changes.
The reality is that as extraordinary as the QE program has been in
its size, scope and market impact, the unwinding process will be
even more significant. One could envision the Fed stopping the bond
purchases at some future date, but letting its balance sheet shrink
back at a slow and methodical process over an extended period of
time through natural maturities.
This is an extremely useful debate given the centrality of the
program to the market's gains. And the debate may be timely as
well. After all, the economy seems to chugging along just fine,
with momentum in housing appearing to offset some of the headwinds
from the payroll tax increases and the budget sequester. At least
that’s what some of the more recent data, like Monday’s Retail
Sales numbers, seem to suggest. We have plenty of important
economic data on tap later this week that will shed more light on
the economy.
The Fed’s goal will be to change
the program without materially disrupting the market. Market
disruptions mean sudden changes to interest rates, foreign exchange
rates, and the values of other asset classes. But it's hard to
envision the stock market hanging on its recent gains in the
absence of an active QE program. I have long been of the view that
the stock market's record level is not reflective of fundamental
realities. As such, most of the recent gains will not be
sustainable in a world after QE.
Sheraz Mian
Director of Research
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