End the Fed (Easing)?

This is the way the Fed ends its easing. Not with a bang but with a whimper.

With apologies to T.S. Eliot, the Fed doesn’t have to end its innovative asset-purchase program with grand announcements and immense bond sales. It could, of course. It could declare the end of quantitative easing tomorrow, and begin selling tens of billions of Treasuries every day to reduce rapidly its $3 trillion balance sheet. Such an approach would overwhelm the markets. There isn’t enough liquidity available to buy the Fed’s supply. Interest rates would spike and global markets would plunge.

So such an approach would destroy the US and world economy. The only asset that might appreciate in such a scenario would be cash, as interest rates would zoom upwards. For obvious reasons, the Fed is unlike to adopt such an extreme approach—“going from wild-turkey to cold-turkey,” as one Fed President has put it.

Instead, they are much more likely to simply reduce their asset purchases gradually, assessing the impact as the current $85-billion / month program goes to $60 billion and then $40 billion and so on. Most of the Fed’s debt matures in well under ten years.

The first step would be to lay out an exit plan and float it publically, as they did recently in the Wall Street Journal. But it took years to adopt our current monetary-policy mix. It’s likely to take years to get out of it as well.

Douglas R. Tengdin, CFA

Chief Investment Officer

By |2013-05-13T10:18:25+00:00May 13th, 2013|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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