Thursday, June 20, 2013

Fed Unlikely To End QE

Both bonds and stocks, not just in the U.S. but interestingly in most other countries as well,  have sold off heavily after the Fed expressed optimism about how the U.S. economy would develop, something that was interpreted as a signal that it might reduce its bond purchases.

I however doubt that they will actually do that anytime soon. The U.S. economy is expanding, but very slowly, so slowly that the employment to population ratio was no higher in May 2013 than in May 2012.

And though Bernanke may have hinted that the criteria for drawing down QE is a 7% unemployment rate, the official statement keeps mentioning the 6.5% rate, along with expected inflation of 2.5%

Furthermore, the negative market reaction to the possibility of reduced QE may prove to be a case of "self-preventing prophecy". The large sell-off to the hint of such policy change could deter the Fed from actually going through with it.


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