QE is Over
October 30, 2014
The FED announced yesterday that QE has ended. Did you hear the applause? We didn’t either. In our opinion, the end of the FED’s unprecedented bond purchase program was long overdue. Why is that? Let me explain.
- Low interest rates helped spur economic growth after the 2008 bank and mortgage debacle. Now 6 years later, the low rates are having little or no impact on the economy. Individuals have refinanced their mortgages (some several times), corporations have borrowed everything they need for the future, and municipalities adjusted their debt to take advantage of the low rates. At this point, we don’t need any more cheap money. We need to allow natural markets to work through our recovery from this addiction to cheap money. Once rates creep higher, our belief is savers will be rewarded with something they haven’t seen in years…interest. Bank statements showing .01% or .001% are penalizing retirees that aren’t comfortable with a long term CD or the even the stock market. The result is bank balances that are higher than they should be with little in return for the saver. Higher rates will bring consumer spending, which is 2/3 of our economy, and will offset the downside of higher borrowing costs to consumers and corporations.
- QE1, QE2 and QE to infinity (the last round of bond purchases) have left a fog over the state of the economy leaving us wondering if the economic numbers are real. It might take a quarter to settle, but eventually we will get a clear picture on economic growth in the US. Today, the first estimate of GDP for Q3 was released and came in at 3.5%. A Good number, but many don’t believe it. In spite of Ebola, Obamacare, higher tax rates, etc. the economy is improving. We are encouraged by the numbers, but want verification without all of the FED intervention as we move forward.
- The FED’s balance sheet currently sits at almost $4.5 Trillion. We have never had this level of manipulation in our financial system. Our biggest concern flows from the question “What can the FED do if we enter a recession in 2015?” (we don’t believe it will happen, but it could). They can’t lower rates because they are already at zero. The balance sheet expansion has no room to grow so they are effectively on the sidelines if we see a slow patch in the economy. While we know it is not a rosy scenario, it’s the reason why we are cautious with our portfolios.
The next few months will be telling for the economy and the FED. We hope bright spots in the economy, such as energy and manufacturing, continue to shine and the FED holds steady with no additional QE. Predicting the future is impossible, but we do know it will be interesting to watch and see what happens.