How quickly things change!
The Federal Reserve board was a little shy about tipping its hand yesterday, and so instead it sent chairman-for-the-time-being Ben Bernanke out to slyly break the news at a press conference.
Quantitative easing — the potentially deadly money printing experiment — could slow down at the end of this year and might even end in the middle of 2014.
For those who expected QE to last forever — and the third version that was announced last September was nicknamed QE Infinity — this was bad news.
Wall Street thought things were hunky-dory after the Fed’s 2 p.m. communiqué did not mention a change in QE. But then Bernanke opened his mouth — perhaps unintentionally — at the press conference 30 minutes later and gave a timetable for QE’s possible demise.
Stock prices fell suddenly.
At the end of the day, the Dow Jones industrial average shed 206 points even though there have been plenty of semiofficial leaks that QE, like Bernanke, was soon heading into semiretirement.
A stock market that has feasted on all the extra liquidity that QE provided was left wondering where its next meal would come from.
The more important reaction came from the bond market, where interest rates continued to soar. The rate on the government’s 10-year bond, for instance, rose to 2.35 percent. It had been just 1.90 percent in early May.
At this pace, a 30-year fixed-rate mortgage will be well above 4 percent, up substantially from 2.9 percent at the beginning of May.
Bernanke has been trying to keep long-term rates down, but since May, the financial markets have been telling him to stuff it. Rates on the 10-year and 30-year bond have been creeping up in spite of the central bank’s wishes.
Yesterday’s coy disclosure about the possible end of QE only gets the Fed caught up with the markets — and almost makes it look as if Bernanke was pleased with higher borrowing costs.
If you think that’s the end of it, think again.
All of yesterday’s disclosures came with more warnings than a prescription of Viagra. Bernanke cautioned that QE will fade out if economic conditions warrant it.
The trouble is, the economy isn’t really doing what Bernanke thinks it is. So don’t be surprised in the next couple of months if there’s an about-face and all this QE retirement talk is, well, retired.
Which is too bad.
QE has done little to help the economy, and its best reason for sticking around these days is that it makes it look like something is being done.
With all its brainpower and its Ph.D.s and all its funding, the Fed still has misperceptions about the economy that are truly amazing.
For instance:
ï®* Bernanke still insists on pegging his policies to the unemployment rate. Yesterday he seemed to think 7 percent unemployment was a good level at which to alter policy, although he previously has used 6.5 percent. The unemployment rate in May was 7.6 percent, and Bernanke’s new number magically means he’s closer to his goal.
ï®The problem is that the unemployment rate is irrelevant. If the economy ever starts to really improve, more people who have been out of work will start looking.
And because of the way the Labor Department calculates this number, that will cause the jobless rate to rise.
ï®* Bernanke seems to be pleased with the progress in the housing market. But as I showed in previous columns — and the New York Times and Wall Street Journal have since confirmed — investment companies have been grabbing thousands of homes. That, not demand from regular buyers, is causing housing to improve.
* The jobs picture is not as rosy as the Fed believes, as the number of jobs being created each month continues to be subpar. And, as I’ve been documenting, even the subpar number of new monthly jobs is misleading because it includes assumptions that are pulled out of thin air. Many of these new jobs might not even exist.
And the jobs that are being created aren’t of very good quality.
* Regarding inflation, the Fed chairman seems to be more concerned that it isn’t too high. It’s running below his 2 percent annual target, he said.
But private surveys that show a rebound in the housing market (without giving the true reason) are also showing home prices rising by double digits. Yet the Bureau of Labor Statistics, which calculates the official consumer inflation rate, has housing inflation up only 2.3 percent from May 2012 to this May. Why not double digits, like the private surveys?
ï®* Lastly, growth in the nation’s gross domestic product improved by a modest 2.4 percent in the first quarter of 2013 despite years of money pumping from the Fed. And that growth could be even less in the three months ending June 30, mainly because government expenditures have been trimmed.
In other words, the US economy may be weaker than the official figures show — and Bernanke thinks.
Let’s see in a few months if the Fed still thinks it can curtail QE.
I don’t think it will take even that long for the Fed to back off.
If the stock and bond markets continue to revolt, in a week or so the Fed’s mouthpieces in the media will start spreading rumors that Bernanke’s statements yesterday were misinterpreted.