Will the Fed taper soon? The New York Times suggests so, reporting that the Federal Reserve is preparing to reduce its bond-buying under its policy of “quantitative easing”, a.k.a. money printing. The Times notes that
Lower federal deficits have reduced the issuance of government debt, so the Fed is buying a growing share. And as higher interest rates have reduced the demand for mortgage loans, the Fed is buying a larger share of government-backed mortgage bonds, too.
This is not saying a little. A year ago, the Fed was responsible for buying 90% of U.S. bonds. So what the Times is saying is that the Fed is near becoming the only purchaser of U.S. government long-term debt. The Times amusingly continues:
“The best argument for tapering sooner rather than later?” Peter R. Fisher, senior director at the BlackRock Investment Institute, wrote in a recent analysis. “The Fed is running out of stuff to buy.” He estimated that if it maintained the current level of asset purchases, the Fed could soon be consuming all the new issuance of Treasuries and mortgage bonds.
Then again, the Times has been reporting that a “taper” is just around the corner fairly consistently, even though the Fed has itself made perfectly clear that any reduction in its asset purchases would need to be predicated upon a stronger “recovery”, which never materializes. In September, for example, the Times said a taper would occur at the end of the year (I commented about how that was nonsense.) Well, it’s the end of the year, and now the Times acknowledges there won’t be any taper this year.
But there’s a problem. If the Fed wants to unwind its balance sheet, who is it going to sell to?
The Fed can’t “taper”, and they know it. If they stop giving the economy its fix of easy credit, interest rates will rise and the economy will sink back into recession. This is what needs to occur, but they won’t let it happen. Instead, they will go all in trying to keep interest rates low and trying to further inflate the bubble in stocks, housing, and bonds.
And when the bubbles burst and the “expert” economists try to deny that the Fed was responsible and instead blame it on the “irrational exuberance” of the market, or “animal spirits”, or whatever, keep in mind this little tidbit the Times informs us of:
The point of the program is to encourage risk-taking by business executives and investors…