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  • QE Tapering: Factors That Challenge Fed's Target Inflation Rate And Economic Growth [View article]
    Dear @gwaterloo,

    FHFA Housing Price Index had been in the negatives since mid 2007 until last year when it turned into positive, on the back of Fed's QE3 purchases of $45 billion a month of mortgage backed securities, which provided the much needed liquidity to revive the housing sector. The mortgage rates had fallen to as low as 3.4% in April, which has been crucial to the housing sector recovery and reflects in the FHFA index. While rising house prices are definitely a positive sign for the economy, the fact that it may not be sustained on the back of the Fed's indication that it would taper or stop purchasing mortgage backed securities caused the mortgage rates revert to nearly 4.5%, levels not seen since 2011, over the past 2 months. This would in turn dent the consumer confidence and would show up in FHFA index in the near future (due to the index being a lagging indicator) if conditions do not change.

    Before QE, the economy was in good health and gold seen as an alternative investment to stocks and bond markets, as well as a hedge against inflation. However, when the economy collapsed during the financial crisis, the Fed had to introduce the quantitative easing program which made the dollar weaker, and higher inflation expected to occur rapidly. Due to the factors explained in my article inflation has not jumped to the expected levels, but only a few months ago gold had hit record levels. However, the talk of QE tapering meant that there is going to be deflationary pressures again with the withdrawal of the liquidity from the economy, and consequently gold prices nosedived. How much the gold prices would recover in the long term would depend on how soon we achieve sustained economic growth and the target inflation levels, with QE or without it.

    Thanks.
    FxStocksData
    Jul 31 05:17 PM | Likes Like |Link to Comment
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