While Ben Bernanke and all other FOMC members prepare another meeting to decide the future of monetary policy, the range of economic data to digest is huge. This could be a good sign that suggests a mild economic recovery. However, this recovery will lack enough enthusiasm to support the “tapering” decision that the FED would like to present as a solution.
Although economic data points to an improvement since the peak of the crisis, Ben Bernanke is concerned with the consequences “tapering” its current QE program will have on the economy. As we already saw, Treasury yields are rising fast. From a bottom near 1.66 earlier in the year, a 10-year government bond is now yielding 2.94%. If the FED makes cuts on its current $85 billion/month asset purchase program, yields will continue to rise. This may result in a situation that will undermine the current economic recovery. Presently, it isn’t in a strong enough position to cope with this kind of negative shock.
At the same time, the pace that the economic data is improving has not been coming at a pace that the FED is comfortable with. Understandably, they want security before ending their QE program. Jobs are being created, GDP is growing, but the number of people who are marginally attached to the workforce is growing rapidly. Many are living at or below the poverty threshold while financial assets rise highly above what the reality of the current economy is capable of supporting.
Let’s examine the most important facts surrounding the year just elapsed since the FED started its latest round of quantitative easing:
These are just some of the numbers that will weigh on Bernanke’s mind during the upcoming week. He will have a tough call to make, as it is almost certain that the U.S. economy won’t have the means to survive from the inevitable withdrawal symptoms derived from QE absence. Simultaneously, mainstream numbers show that it may be time to cut on some select measures. This will allow us to save some fireworks in case they’re needed later.
As for the stock market, the near future isn’t bright. Investors should be cautious here. With Treasury yields already rising, their effect on the stock market is inevitable. Rising interest rates negatively affect company earnings, leading to negative changes in their market value. A correction will have to occur, sooner rather than later. This is especially important at a time when the S&P 500 is just a few percentage points below its record high, and 18% up YTD. Even if Bernanke decides to “not taper” next week, any upside for stocks will be limited. It will be very difficult for the FED to manage expectations for increasing interest rates, independently based on what Bernanke’s decision.
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