Will The Fed Really Cut QE Before Year s End Penny Stock Research

Post on: 15 Май, 2015 No Comment

Will The Fed Really Cut QE Before Year s End Penny Stock Research

A couple of top economists shocked the market yesterday.  According to Bloomberg. two former Fed economists said the central bank will cut its monthly bond buying from $80 billion to $50-$60 billion in the fourth quarter.

The two see such a cut as the first step in a three-step strategy to wind down the Feds latest round of quantitative easing.  The first cut would be followed by a second to $30 billion.

And after the second cut, the Fed would stop buying bonds under the program all together.

Such a plan, Michael Feroli, chief US economist at JP Morgan Chase, told Bloomberg would be enough of a runway to know and gauge the effects of what theyre doing, but not too long a runway where its a painfully interminable process.

The logic behind a gradual reduction in QE spending makes sense. 

If the Fed were to end QE entirely all at once, it could start a panic and send interest rates soaring.  A gradual approach should lessen the impact and help avoid major disruptions to the market.

With that said, its hard to see the Fed reducing, let alone completely eliminating, QE any time soon.

The Feds official policy is that it will continue QE until it sees substantial improvement in the labor market.

While its not exactly clear what would constitute substantial improvement, the Fed has provided clues.  The central bank indicated in December it would not consider raising short-term interest rates until the unemployment rate fell to 6.5% or below and inflation remained below 2.5%.

If 6.5% unemployment is indeed the trigger, then were not even close to seeing an end to QE.

According to the latest jobs report, the unemployment rate was 7.6% in March.  The good news is the rate declined by a full percentage point from February.  But the bad news is it appears that was due to nearly 500,000 people dropping out of the labor force rather than a big increase in new jobs.

The April jobs report is due on Friday, but most economists are forecasting unemployment to remain unchanged at 7.6%.

Will The Fed Really Cut QE Before Year s End Penny Stock Research

Whats more, the latest economic data show the economys still struggling.

GDP increased by just 2.5% in the first quarter of this year.  While thats a big improvement over the fourth quarters anemic 0.4% rise, economists were expecting an increase of 3% or more.  No question about it, this data shows the economy is growing more slowly than most experts thought.

And we could see economic growth slow even further as tax increases and spending cuts from earlier this year begin to have an impact.

Another sign of growing weakness was provided by the most recent factory purchasing managers index.  The popular gauge of manufacturing activity fell from 51.3 in March to 50.7 in April.

While a reading above 50 means the economys expanding, the downward direction of the index does not bode well for the immediate future.

Now, Im not saying these data suggest the economys tanking.  But they do show that a slowdown is underway.  As such, I dont think we need to worry quite yet about the Fed cutting back on QE.


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