KRISTINA PETERSON at WSJ writes:
The Federal Reserve should stop buying bonds, even as the central bank is poised to purchase more, according to a narrow majority of economists in a new survey by The Wall Street Journal……”It’s distorting market prices and creating problems in the future,” said John Silvia, chief economist at Wells Fargo Securities, who said the Fed’s bond-buying was making long-term Treasurys too expensive without significantly easing problems in the labor market. “The Fed needs to back away and let interest rates rise just a little bit,” he said.
If past performance is anything to go by, Fed quantitative easing (or bond buying) is ineffectual in lifting the employment rate. And the lower that they drive bond yields, the greater the backlash when yields eventually rise. Yields are likely to spike up rapidly as bond-holders attempt to offload positions in order to avoid massive capital losses.
via Risk Seen in Fed Bond Buying – WSJ.com.
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
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The FED is responding to political imperatives rather than fiscal issues. Ben wants to be reappointed and is trying to please the political class. A good story can be made that Alan Greenspan produced many of the problems confronting the US with his reluctance to raise rates even though he knew that rates were producing “irrational exuberance”in the 90’s and the housing bubble in early 2000’s. This endeared him to the political class and enabled him to be reappointed by both R’s and D’s. The experience of Paul Volker shows that if you do the right thing and it is politically painful like the recession of the early 80’s that you are a one termer. Ben knows his history.
Good point