Former Prime Minister Paul Keating once described former MP Peter Costello as ‘All tip and no iceberg’. We’ve been waiting to use the phrase on an unsuspecting victim ever since. Today is the day.
The US Federal Reserve is all tip and no iceberg. After triggering a media and market storm over ‘tapering’ of its $85 billion a month QE, it did nothing last night. Of course, creating $85 billion a month is a unique kind of ‘doing nothing’ that only a central bank can come up with.
Why the change of heart? Reading the actual Federal Reserve statement will make your head spin. In short, the American economy isn’t doing well enough to take away stimulus just yet. Or, as New York Magazine put it, ‘The Fed Decides the Economy Still Sucks‘. The risk of a crisis is supposedly less, but the economy isn’t quite good enough.
What’s odd is that everyone is saying the taper is merely delayed. If markets forecast, then surely a delayed taper is almost as influential as a taper now. The Financial Times’ Gavyn Davies reckons December is the new September. Septaper just became Dectaper.
One Federal Reserve board ‘dissenter’ to the decision to continue QE said that it was increasing the risk of a crisis down the road. More money printing worsens the kinds of imbalances that caused the crisis in the first place. You get imbalances, bubbles in various asset classes, and unproductive investments. Blogger extraordinaire Tyler Cowen points out that delaying the taper has a trade-off. The bubbles get bigger, making them more painful when they do pop. Each time the Fed delays tapering, it makes tapering more dangerous and less likely in the future.
When the tip turned out to lack an iceberg, markets reacted with ‘full steam ahead’. Stocks, bonds and gold surged. In fact, gold surged just before the announcement, triggering the usual rumours of a leak. It was the best move for the metal since 2009. The ‘Homebuilders’ index rose more than 4%. And the Aussie dollar popped back above 95 cents. Emerging markets surged even more, with the broadest emerging market ETF up over 4%.
All this suggests that the market expected a tapering. Money Morning‘s Kris Sayce didn’t. He sent this email around this morning:
‘I’m sorry, but I just don’t think it’s a surprise. I’ve said all along the Fed has no intention of allowing [interest] rates to go up. I’m surprised that the whole market is surprised the Fed isn’t tapering. You don’t blow up a five-year experiment for the sake of a measly $5 billion a month. Low interest rates guys, that’s the name of the game, low interest rates. The Japanese have played this for over 20 years, the Fed isn’t going to bailout after just five…’
Kris is referring to the fact that the interest rate the US economy runs on isn’t the Federal Reserve controlled Fed Funds rate, which has been 0% for a while now, but the 10 year bond yield. Mortgages are usually pegged to this rate, and so are many other financial contracts. And the yield has been rising rapidly in anticipation of the taper. On the announcement of no tapering, it tanked.
In fact the Federal Reserve referred to rising interest rates, which are endangering the housing recovery, as a reason for their continued QE. After pumping the economy full of debt, higher interest rates are the worst thing that could happen.
for The Daily Reckoning Australia
From the Archives…
Emerging Markets Walk The Tapertalk
6-09-2013 – Nick Hubble
House Prices Halve Without a Recession
5-09-2013 – Nick Hubble
A Manufacturing Industry Revolution
4-09-2013 – Nick Hubble
How the RBA is Using Low Interest Rates to Destroy Your Wealth
3-09-2013 – Nick Hubble
Is the Stock Market Predicting War?
2-09-2013 – Nick Hubble