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Joe Barbieri has Bachelors' degrees in both Civil Engineering and Commerce from the University of Toronto. He has worked in the Financial Services field for over 13 years, with over 10 years on the institutional side of the business. He has covered positions from Fund Accounting to Investment... More
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  • To Taper Or Not To Taper, Or To Expand? 0 comments
    May 29, 2013 3:51 PM

    The latest Federal Reserve meeting on May 22, 2013 has provided some very conflicting signals (2). On the one hand, Federal Reserve Chairman Ben Bernanke states that "A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further,"(2). This is interpreted to mean that Quantitative Easing is necessary for the recovery to continue. Without Quantitative Easing, the recovery has a "substantial risk" of failure. Looking at this more closely, the economy is really on monetary life support and is not running on its own steam. Once the life support is removed, the economy will suffer. Since this Quantitative Easing has been going on for over 5 years, do we really have a recovery?

    On the other hand, there was another statement that Bernanke made which is: 'the Fed could "take a step down in our pace of purchases" in the "next few meetings."'(2). Even though the recovery is on life support and has been there for years, there is a willingness to take the risk of slowing Quantitative Easing anyway. The criteria used to determine whether tapering should take place or not is a consistently better labour market and inflation changes. Yes, the official unemployment number is down to 7.5%. Is this good? Is it consistent? If it is, the tapering of the QE program would have started already. Inflation has been dropping lately and the official numbers remain low. Recoveries are usually accompanied by higher prices. (3)

    Do these two statements mean that the Federal Reserve is not sure what to do? Does it mean that the Fed wants one outcome, but the economy is not co-operating so another outcome is emerging? The two sets of statements appear to be completely opposed to each other, but this could be a sign of indecision more than anything else. Which one do you believe?

    Sources:

    1) http://www.cnbc.com/id/100352475

    2) http://www.bloomberg.com/news/2013-05-22/bernanke-says-premature-fed-tightening-would-endanger-recovery.html

    3) http://www.usinflationcalculator.com/inflation/current-inflation-rates/

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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