Why QE Can Never End

By: John Rubino | Wed, Jul 31, 2013
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The Fed just made an announcement that the markets liked:

Fed stays on track with bond buying, for now
WASHINGTON (Reuters) - The Federal Reserve said on Wednesday the economy continues to recover but is still in need of support, offering no indication that it is planning to reduce its bond-buying stimulus at its next meeting in September.

The central bank said after a two-day meeting that it would keep buying $85 billion in mortgage and Treasury securities per month in its effort to strengthen an economy that it said was still challenged by federal budget-tightening. It also pointed to a recent run up in mortgage rates.

In a post-meeting statement, policymakers described economic activity as having expanded at a "modest" pace in the first half of the year. They had called the recovery "moderate" after their last meeting in June.

In another departure, the Fed's policy-setting committee signaled some concern about the low level of inflation.

"The committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term," the Fed said.

Why the cautious tone when just a few months ago "tapering" was a sure thing by yearend? Because this morning's GDP report was, as usual, much weaker than it looked. Here's a quick summary from Consumer Metrics Institute:

The new set of numbers for the 2nd quarter of 2013 in fact show weaker growth than previously reported numbers for the 1st quarter, but through the magic of historic revisions the headline (and the press release) can now tout quarter-to-quarter economic improvement -- which should excite any markets that are blindly eager for good news, even if that good news is constructed from a revisionist history.

Unfortunately, we can't ignore a pattern of significant downward revisions to recent past data -- suggesting a deeply rooted positive bias in the BEA's "real time" reporting, including each of the prior four quarters. Even the number published just last month was revised materially downward by -0.64% (i.e., over a third of the previously reported growth has vanished).

Among CMI's other points:

Even if we accept all the fluff in today's numbers, a chart of recent GDP growth shows a hard stall, not a take-off. The Fed knows all this and has now completely walked back its talk of lowering its asset purchases. QE will go on until the market, not government, puts a stop to it.

US GDP % Change Chart

 


 

John Rubino

Author: John Rubino

John Rubino
DollarCollapse.com

John Rubino

John Rubino edits DollarCollapse.com and has authored or co-authored five books, including The Money Bubble: What To Do Before It Pops, Clean Money: Picking Winners in the Green Tech Boom, The Collapse of the Dollar and How to Profit From It, and How to Profit from the Coming Real Estate Bust. After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a currency trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He now writes for CFA Magazine.

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