What the Fed Says, and What it Does

Posted by Mark Jasayko, CFA, Portfolio Manager

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McIver Wealth Management Consulting Group / Richardson GMP Limited

One final comment on TAPER-gate.

A number of strategists and analysts were surprised by Ben Bernanke and the Fed’s decision not to “Taper” the rate of QE money-printing at their September meeting.

However, this behavior from the Fed is not without precedent.

Back in the autumn of 2008 when the Fed first implemented the policy of Quantitative Easing, Ben Bernanke was very quick to assure markets that the Fed would begin to “Exit” from this policy in April of 2009. That helped to make this very experimental policy more palatable.

To “Taper” merely means to slow the rate. But “Exit” refers to a complete reversal of the policy; actually removing the printed money.

Well, April 2009 came and went despite Bernanke’s promise of an “Exit.” Now, here were are five years later, and we have yet to see a single dollar from QE1, QE2, or QE3 removed from the money supply.

This might provide some insight into the Fed’s actual intention to “Taper.” For years they have found reason after reason not to “Exit.” Expect the same with respect to “Tapering.” Over the last three months, Bernanke has become more vocal that “Tapering” is data dependent. Somehow, I sense that the data will tend to be interpreted to support the notion of continued Quantitative Easing. It is unlikely that the policy of QE will never really end until investors say that it has to by pushing market-determined interest rates significantly higher at some point in the future.

Continued Quantitative Easing is not necessarily always the recipe for sizable stock market gains, but it will have the effect of placing a floor under the market and limiting the amount of actual and implied future volatility. This should help to provide a comfortable environment for stock market investors, at least over the near- to mid-term.

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