JAN 2, 2014 3:41pm ET

Fed Purchase Stepdown Will Be $10B per FOMC Meeting

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Judging from its most recent monetary policy moves, it appears the Fed's current plan is to reduce monthly asset purchases by about $10 billion at each of its FOMC meetings in 2014, according to Bill McBride, author of Calculated Risk.

“That would put the monthly purchases at close to zero by December 2014,” he notes in his market outlook report. Meanwhile, many are wondering whether it is possible the Fed will continue to buy assets in 2015.

The reduction of monthly purchases of U.S. Treasury and mortgage-backed securities to $75 billion, instead of $85 billion, means the Fed trimmed QE from $1.02 trillion of new money it created in 2013 to $900 billion in 2014, says Richard Ebeling, professor of economics at Northwood University.

The Fed has also pledged to keep key short-term interest rates practically at zero. As a result, "for the foreseeable future, America’s central bank will continue to prevent financial markets from working properly,” he adds.

Artificially low interest rates and the Fed’s control over prices affect savers and borrowers by distorting the balance between “sustainable resource use and investment decision-making,” not allowing financial markets from correctly setting the price to borrow and lend, he argues. “This means that the ‘trimmed’ quantitative easing and interest rate manipulation continues to threaten investment instability and the danger of another boom-bust cycle further down the road.”

The Fed’s highly expansive monetary policy has primarily encouraged an increase in the demand for existing assets leading to “asset bubbles, rather than new investment," generating a boom in the stock market but inadequate returns for savers, says Nicholas A. Lash, professor of finance at the Quinlan School of Business, Loyola University Chicago.

“Moreover, low rates encourage both increased borrowing and the pursuit of higher returns through riskier investments. Did we learn nothing from the last crisis?”

In his view, the current expansive monetary policy would work if accompanied by tax cuts and less regulation, which unfortunately is not the case causing inadequate economic growth and “stubbornly high” unemployment.

Very slow economic growth and the still high unemployment rate at the 7% range are among the top concerns for this year that directly affect the housing market recovery.

“It is very likely that QE3 will be completed by the end of 2014,” notes McBride, but it is unlikely the Fed “will accelerate the pace of the taper significantly.”

The reason, McBride wrote, is because although the Fed is not on auto-pilot, it remains data-dependent.

His calculations based on Federal Open Market Committee data suggest that during its eight upcoming annual meetings of 2014, the FOMC may reduce the pace of asset purchases at about $10 billion per meeting.

In January FOMC will start reducing its purchase to $75 billion in assets, then $65 billion in February, and progressively less at each meeting all year, “and conclude QE3 at the end of the 2014.”

The Fed would slow the taper, McBride notes, only if inflation declines sharply or if the economy stalls, which he finds unlikely.

Regulation is creating a vicious circle and investor responses the Fed cannot control. 

“Whenever Fed officials speak of manipulating interest rates, money supply, or other aspects of the economy, they speak of manipulating people,” says Steve Stanek, research fellow, budget and tax policy at The Heartland Institute. “If its commitment to go much longer with interest rates near zero continues the Fed’s war on savers, conservative investors, and persons living on fixed incomes.”

Going from $85 billion to $75 billion a month in money creation is virtually meaningless, he adds.

“The only sure thing from the Fed’s policies is that another bust is on the way.”

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