In science fiction movies, brave explorers find sealed capsules in hidden places that contain messages from ancestors to descendants. It seems the FOMC protocol, which will contain the decision to raise the interest rate, will not be released for a long time. The concepts of ‘tightening monetary policy’ and ‘raising interest rates’ in the US have gradually moved from practical tools to theory.
Monetary Policy of the Fed: Reading the Minutes
According to the results of the October 29-30 meeting, the Federal Open Market Committee stated that even if the financial stimulus program is reduced, the interest rate will remain low for a long time. However, the American regulator has not yet specified the exact timeline for reducing the QE3 program. The lack of clear communication from the regulator has led to volatility in financial markets.
No Statistical Basis
Despite the monthly economic report from the Fed, known as the Beige Book, which claims moderate growth in the US economy, the real picture, according to published statistics, looks less optimistic. The latest FOMC statement confused the markets with a phrase about improving labor market conditions, although the delayed NonFarm Payrolls report and the ADP report released on the day of the regulator’s meeting were disappointing. Without a clear positive trend in the labor market, and considering that achieving maximum employment is one of the main goals of the Fed, the reduction of financial stimulus can only begin in the case of a threat of ‘stock market bubbles’.
Dealing with Consequences
It is also unrealistic to expect that key economic statistics will suddenly show a steady positive trend. Industry experts have debated for years whether the damage caused by two weeks of unpaid government shutdowns and furloughs of government employees is real or not. In my opinion, the damage is serious, as consumer confidence is affected, and consumer spending is the main component of US GDP. In addition, it should be remembered that budget disputes in Congress have lasted three years. According to research by Macroeconomic Advisors, this has led to a 1% decrease in industrial production and higher borrowing costs.
In Reality, Nothing Has Ended
In reality, the budget battles are not over. The opposing sides have received some breathing room, but after that, political opponents will again try to extract dividends from the crisis, while financial market nervousness will rise again. We remind you that, without any formalities or the tendency of Americans for dramatic Hollywood moves, the situation threatens the US with default on its debt obligations. As a result, the credit rating under review by Fitch may be downgraded, leading to serious negative consequences for the US economy. How can there be a reduction in QE?
Hawks Turn into Doves
Recently, the head of the New York Fed, Richard Fisher, criticized Washington in his speech, stating that politicians are acting recklessly by placing unrealistic hopes on the Fed. Essentially, Fisher, who supports the reduction of the financial stimulus program, warned that the current tax and budget policy is causing delays in the reduction of financial stimulus.
Essentially, the above reasons allow us to conclude that despite the recent predictions of The Wall Street Journal analyst John Hilsenrath, the topic of QE-Exit will likely not be discussed at the December meeting. It should also be considered that the December meeting will be the last one in which Ben Bernanke will participate as a sitting chairman. Traditionally, no major decisions are made in such cases. It is unlikely that the Fed will change this tradition in December. Janet Yellen, whose nomination to the position of Fed Chair will be submitted for approval to the Senate Banking Committee on November 14, is unlikely to take immediate action at the January meeting, especially since she is a strong supporter and one of the authors of the quantitative easing program.
Currently, the markets are overwhelmed by unreported US statistics, and honestly, the situation does not look very optimistic right now. In essence, talking about more or less clear timelines for the exit from QE can only be done after the release of data on US GDP for the third and fourth quarters. Also, I hope that under Janet Yellen’s leadership, the Fed’s communication policy will change, ending speculation on the markets regarding the quantitative easing program.
FAQ
What is QE?
QE stands for Quantitative Easing, a monetary policy tool used by central banks to stimulate the economy by increasing the money supply.
Why is the Fed delaying the exit from QE?
The Fed is delaying the exit from QE due to weak economic data, ongoing budget disputes, and concerns about market stability.
What impact could a US default have?
A US default could lead to a downgrade in the country’s credit rating, increased borrowing costs, and significant negative consequences for the global economy.
