Thursday, June 20, 2013

Two more articles on QE3

by Bill McBride on 6/20/2013 10:06:00 PM

From Merrill Lynch:

Fed Chairman Bernanke expects to start tapering before year-end, provided momentum continues in the labor market. Bernanke has clarified his reaction function and, as a result, we are changing our Fed call: we now expect the Fed to announce tapering in December with the first rate hike to begin in summer 2015. Soft inflation in the near-term will not dissuade the Fed from tapering, but we think the Fed will want to see inflation make steady progress toward its 2% target to begin rate hikes.
emphasis added
From Neil Irwin at the WaPo: This is why global markets are freaking out
This isn’t a crisis like the ones that struck the United States starting in 2008 or Europe in 2010. Rather, it is a byproduct of the world’s central banks, having intervened on vast scale to deal with the economic travails of the last several years, introducing uncertainty and even a little chaos as they start to contemplate how and when the era of easy money might end.
...
One saving grace for the United States: If the market swings really do undermine U.S. growth, then the Fed, as Bernanke said repeatedly in his news conference, will move that much more gingerly in removing its help for the economy. Indeed, just Thursday, investors’ expectations for inflation over the next few years fell 0.1 percentage point, to 1.75 percent, the lowest since last July. Because the Fed aims for inflation of 2 percent, that would suggest there is more room for the central bank to pump money into the economy without sparking an outburst of higher prices.

In effect, with the Fed starting to think about an exit from an era of easy money, it will be a great test of just how resilient this economic recovery really is. If the whole thing — the rises in stock prices, in corporate earnings, in the housing market, even in job growth — is driven solely by the flood of money, or whether five years of zero-interest rates and trillions of dollars in bond purchases have succeeded at getting a more resilient economic engine for the United States up and running.
Friday economic releases:
• At 10:00 AM ET, the Regional and State Employment and Unemployment report (Monthly) for May 2013