Feds to Taper

Last month Ben Bernanke, chairman of the Federal Reserve, stated that the Feds would finally begin to taper, or cut back, on their quantitative easing (QE).  In short with QE the Fed has printed large sums of new dollars then spent much of this to purchase government bonds and treasury securities, all to stimulate the economy and keep interest rates low.

Some analysts believe the Feds have stirred a “mini boom” in the housing market with this policy.  A side note is that the QE policy has added substantially to the national debt.

Bernanke, who will soon be replaced by Janet Yellen as Fed Chairman, said in December that the Fed would begin tapering back on its $85 billion a month bond buying program.  He said, that beginning in January, the Fed would purchase only $35 billion a month in mortgage backed securities instead of $40 billion, and also reduce the purchase of long term Treasury Bills from $45 billion per month to $40 billion.  Originally many believed that the Feds would cut QE in half.

Apparent reasons for the Feds actions were attributed to recent upbeat economic data and the bipartisan Congressional budget deal that promises to avoid another government shutdown here in January.

Housing starts jumped 23 percent in November, that’s the highest level since January 1990. Also unemployment numbers have dropped slightly.  On the surface the unemployment numbers look better, but the reality is that we have the lowest labor participation rate in 40 years.

RealtyTrac® (RT), the nation’s leading source for comprehensive housing data says, “the Fed isn’t out of the woods yet. Critics say the Fed has $3 trillion dollars of very long-term assets on its books. If interest rates rise 2 to 3 percent, their market loss could measure in the hundreds of billions of dollars.”

According to RT, supporters of QE argue that, “tapering stimulus now, just when unemployment hit 7 percent from 7.6 in June, is the wrong idea. Advocates want to keep interest rate low to encourage more home buying and hiring.”