Stocks Climb on Fed’s QE ‘Taper’ News, Others Not So Impressed

Stocks Climb on Fed’s QE ‘Taper’ News, Others Not So Impressed
December 18, 2013

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)

Outgoing Federal Reserve Chairman Ben Bernanke on Wednesday announced a slight decrease in the Fed’s unprecedented “quantitative easing” program.

He announced the Fed would spend $75 billion a month to prop up bond and mortgage markets instead of the $85 billion a month it had been spending. He also announced the Fed likely would go years longer manipulating short-term interest rates to virtually nothing. This policy benefits borrowers, including governments, but hurts savers, conservative investors and persons on fixed incomes, because they earn virtually nothing on their money.

“The Federal Reserve’s announcement today that it is ‘easing’ back on quantitative easing basically leaves current monetary policy unchanged,” said Richard Ebeling, professor of economics at Northwood University.

‘Still Preventing Markets from Working’

He said reducing asset purchases $10 billion a month “means that in comparison to the $1.02 trillion of new money that the Federal Reserve created in 2013, the ‘trimmed’ quantitative easing would ‘only’ inject $900 billion of additional money into the financial system and the economy in 2014. Furthermore, the Federal Reserve insisted that it would continue to keep key short-term interest rates practically at zero. This means that for the foreseeable future, America’s central bank will continue to prevent financial markets from working properly.”

Ebeling added, “Interest rates are market prices that bring savers and borrowers together and in balance with each other for sustainable resource use and investment decision-making. Federal Reserve interest rate policy amounts to a continuation of a price control that creates and perpetuates potential distortions and imbalances by not allowing financial markets from correctly setting the price to borrow and lend.

“This means that the ‘trimmed’ quantitative easing and interest rate manipulation continues to threaten investment instability and the danger of another boom bust cycle further down the road.”

Similarly unimpressed was Nicholas A. Lash, professor of finance at the Quinlan School of Business at Loyola University-Chicago.

‘Still Encouraging Risky Investment’

“The Fed’s highly expansive monetary policy unfortunately has primarily encouraged an increase in the demand for existing assets, hence the asset bubbles, rather than in new investment,” Lash said. “The result has been a boom in the stock market but inadequate returns for savers. Moreover, low rates encourage both increased borrowing and the pursuit of higher returns through riskier investments. Did we learn nothing from the last crisis?

“Expansive monetary policy works most effectively if accompanied by tax cuts and less regulations,” Lash added. “Unfortunately, the present administration has been following the opposite course. Adding to these problems has been far-reaching and confusing legislation such as ObamaCare, Dodd-Frank, and the Volcker rule. Thus economic growth has been inadequate and unemployment stubbornly high.”

Fed officials on Wednesday predicted unemployment would fall more over the next two years than it thought in September. The official unemployment number nationally is currently 7 percent, the lowest it’s been in five years.

Lower Unemployment . . . and Employment

But in a report released December 17, economic researchers Veronique de Rugy and Keith Hall of George Mason University noted much of the decline in official unemployment has been driven by a sharp drop in the labor participation rate.

“In 2007, the rate was 66 percent; in November, that rate dropped to 63.3 percent,” the wrote. “In the two most recent jobs reports, the labor-force participation rate has been at its lowest levels in nearly 35 years. Further, the entire drop in the unemployment rate in 2013 so far—from 7.8 percent in December 2012 to 7.0 percent last month—has been from the decline in the labor force rather than from job growth. The employment rate, likewise, has consistently declined, with only 58.6 percent of the population employed—lower than at the end of the recession in mid-2009.”

Others reacted enthusiastically to the Fed’s announcement. This includes Wall Street investors, who sent the Dow Jones Industrial Average up 292 points on the day. The S&P 500 also closed at 1810.65, up 30 points and beating its previous record close on December 9.

“Everyone was focusing on the wrong animal, they were betting on whether the Fed is hawkish or dovish, but they missed the fact that the Fed is bullish on the economy,” said Burt White, chief investment officer at LPL Financial, in an interview for MarketWatch.com.

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)