Fed Announcement - Tying Fed Rates to Unemployment
As many of you have already heard, the Fed announced today that they will continue quantitative easing until unemployment falls below 6.5% or inflation exceeds 2.5%.
So what is everyone's initial reaction to this more aggressive stance from the Fed. The markets seemed to expect this, was the good news already priced in? Or will we see a larger rally?
Also, what happens once we hit 6.5%, and the economy is still weak (ie - rate has dropped mostly due to workers leaving the workforce)? Will the Fed decide to raise their rates? How does the Fed extract themselves at this point now that they are so deep into this?
I am not the resident expert on this, so looking forward to everyone's insight into this new development.
Happy hunting!
http://blogs.wsj.com/economics/2012/12/12/live-blog-fed-decision-and-be…
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Considering the unemployment number is hilariously wayward anyway we should get there soon to prevent some of this stimulus from happening. Really, this isn't new or unexpected from the Fed. I think this has been baked in for awhile now and people simply except QE for a long and extended period of time. Bernanke has said before he will provide it through a recovery to ensure it keeps going.
There is no exit plan or any real precedent for something this large and interventionist. They can't simply wind down their book into the open market as it is just too freaking large and they provide most of the liquidity anyway. They can hold everything to maturity and wind it down that way but considering they are buying longer dated assets that seems silly to hold them that long.
As to what happens when they stop buying? Well... I don't have an answer for you other than I'm extraordinarily bearish on the real US Economy and fiscal picture minus the interventionist fed. Anyone who tells you they aren't monetizing the debt is out of their mind and that is really all we are doing at this point. The only way to really stop this madness is to curtail our deficits and allow the markets to sort themselves out without support or intervention. Until then, who actually knows what the real state of things are?
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