At this morning’s presentation to the House Financial Services Committee, Federal Reserve Board Chairman Ben Bernanke said reductions of the Fed’s bond-buying program, known as Quantitative Easing or simply QE, is “by no means on a preset course” and that the Fed could leave the program intact-or even increase purchases-if warranted.
Most Fed watchers and financial market participants — including many gold traders and investors — are betting QE3 will continue with monthly asset purchases of $85 billion for another quarter or two before a gradual reduction and winding down of the current super-accommodative monetary policy.
But what if labor market conditions worsen and the unemployment rate begins rising — in contrast to popular expectations?? That could easily happen if the U.S. economy stumbles in the months ahead.
Today’s disappointing news that housing starts fell 9.9 percent in June shows the economy’s vulnerability. And, with mortgage interest rates up sharply in the last month, the Fed is now under pressure to step up its purchases of mortgage-backed securities to support new home construction.
Meanwhile, economic growth in America’s export markets, led my Europe and China, is also on the decline and the rise in the dollar exchange rate is making us less competitive with our major trading partners. Net exports have contributed great deal to U.S. GDP in recent years — but we can’t count on this to continue.
And, don’t dismiss fiscal policy and sequestration. Reduced federal spending and furloughed government employees are gradually, almost imperceptibly, retarding business activity and damaging the economy. This is precisely the wrong time to cut spending and balance the budget
Most business economists and government forecasters, especially at the Fed, are continuing to view the economy through rose-colored glasses. But, contrary to popular expectations, the economic indicators are likely to paint a picture of a slowing economy, an economy at risk of tipping into recession.
Fed Chairman Bernanke warned in today’s Congressional testimony, if “the outlook for employment were to become less favorable [as we think it will], if inflation did not appear to be moving back toward two percent, or if financial conditions — which have tightened recently — were judged to be insufficiently accommodative . . . the Fed would be prepared to employ all of its tools, including an increase in the pace of purchases.”
In other words, we could see increased quantitative easing later this year if the economy stumbles badly. As with the past announcements of QE1, QE2, and QE3, the launch of QE4 could give gold quite a jolt into higher territory.
