Yellin' at the Fed
When the Federal Open Market Committee (FOMC) of the Federal Reserve announced last week that it would not yet begin to “taper” its monthly $85 billion purchases of Treasury and mortgage securities commonly known as QE3 (a third round of Quantitative Easing), it came as a major surprise to most Fed-watchers as well as most active stock and bond market participants.
In the hour after the announcement, the stock market went up more than 1.5 percent — over 200 points in the Dow Jones Industrial Average — and over the course of the day, the yield on the 10-year U.S. Treasury Note plunged from about 2.87 percent to 2.71 percent, the biggest one-day drop in long-term interest rates in more than a year. Over the subsequent few trading days, the stock market gave up all those gains and more, but note and bond yield continues to drop, sitting now at about 2.62 percent as investors digest the Fed’s weaker assessment of near-term economic growth.
In short, the Fed’s statement said that economic conditions do not yet justify ending their historically unprecedented support of bond markets. A rational person might say, “Hey, they’ve been doing this on an enormous scale for a year, and on a smaller scale for nearly four years before that, and it hasn’t helped, so let’s stop.” But in government, more money is always the answer.
There are several theories among the professional pundits about what happened. The most plausible is that with the self-removal of Larry Summers from consideration as the next Fed chairman — current Chairman Ben Bernanke is likely to depart in a few months — the next most likely replacement, Janet Yellen, a monetary policy dove of utmost dovishness and probably inclined to continue QE3 for longer than most professional economists would recommend (not that many recommended it in the first place), convinced the Committee that stability of policy, given her preferences for the future, is more important than acting in concert with the prior strong hints from Bernanke that a taper was in fact in the offing.
Please read the entirety of my article for the American Spectator here:
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