On Sept. 18, the Federal Reserve ended their two-day meeting and shocked the financial markets by deciding not to begin tapering their asset purchases.
The Federal Reserve has been buying mortgage and treasury bonds off and on since 2009 as part of a strategy known as Quantitative Easing (QE), which was designed to push rates down and spur the economy.
In the most recent QE move, which took place in September 2012, called QEIII, the Fed announced that it was going to be buying a total of $85 billion in bonds per month ($40 billion in mortgage bonds, $45 billion of Treasuries) or $1.02 trillion per year!
Back in May, the Fed began hinting that it would scale back its purchasing sometime this year, because it finally looked as if the economy had started to get better. Just this hint of a pullback moved the 30-year fixed rate from 3.375 percent in May to a high of 4.75 percent in July. This was almost a 30 percent increase in the cost of money.
The markets were expecting the Fed to scale back its purchases by $10 to 15 nillion, but when they announced no change, the bond market soared (which brings rates down) along with the stock market market. The Dow hit a new high on Sept. 18 on the news that the Fed was going to keep the money flowing.
All of this has left a lot of people confused. I have been saying for quite some time that things are still weak and that the Fed should not have even mentioned anything about tapering until early 2014. The real estate purchase market was just starting to move at a nice pace in the spring, only to have the brakes put on because interest rates moved up so fast.
The Fed cited that the unemployment rate is still unacceptably high, and that the jobs available are low quality and low paying, which does not help us much in terms of economic growth.
The Fed should keep the pedal to the metal until the economy gets off the ground, because dealing with deflation is a lot more dangerous and harder than dealing with inflation.
By not pulling back at this time, the Fed has given the impression that they are afraid that if they took the training wheels off, we would fall, and another fall would be catastrophic.
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