Wither quantitative easing?

Over the last week-and-a-half we’ve had a very good example of why the Fed and other central banks have no practical alternative to continued money printing. The mere hint that the FOMC would start “tapering” its current asset purchases of $85bn a month was enough to send markets into panic mode – with the largest sell-off in the 10-year Treasury Note for a decade, and an even more dramatic fall in the price for bonds with a two-year maturity. Stocks and commodities also sold off – as did precious metals. Gold fell under $1,200/oz last night, but has since climbed back above this number.

What if Bernanke had actually said that the Fed would start reducing the size of purchases, or – Heaven forbid – actually move to a net-selling stance? As it happens, the row-back started soon after the FOMC minutes hit the newswires, with Bernanke noting in the subsequent press conference that “there is no change in policy here”, and that “if the economy does not improve along the lines that we expect, we’ll provide additional support.” If the economy improves, purchases will be scaled back, with a view to ending them completely by mid-2014, if “subsequent data remain broadly aligned with our current expectations".

This is in fact no different from previous incidents over the last four years, whereby we get hints of tighter monetary policy, only for the market to throw a tizzy, thereby scaring the Fed back to more money printing. And as anyone paying attention to Fed forecasts in 2007-08 knows full well, its track record as far as economic predictions are concerned is abysmal. If anyone thinks the Fed does in fact have an exit strategy that it’s getting ready to implement, then our contributing author Chris Marcus has a bridge to sell you.

People will assuredly look back on this period – similar to October 2008, 1999-2001, or the 50% decline in the gold price from the end of 1974 to the summer of 1976, prior to the rally to January 1980 high – as a fantastic buying opportunity.