QE slowdown worries slowing down

Despite subtle references gleaned from the minutes from last month’s Federal Reserve Board meeting, the pace of quantitative easing isn’t subsiding just yet.
“We don’t see any reduction in quantitative easing until at least the fourth quarter, at the earliest,” said Frank Fantozzi, president and chief executive at Planned Financial Services.
The minutes from the March 19-20 Fed meeting, released this morning, showed that some Fed members favor reducing the pace of quantitative easing, which involves the monthly purchase of $85 billion worth of Treasury bonds.
But as Mr. Fantozzi pointed out, that meeting was held last month when much of the data told a different story.
“The minutes made references to a strengthening labor market, but last Friday’s jobs report wasn’t reflective of that,” he said.
John Canally, an economist and investment strategist at LPL Financial LLC, agrees that the Fed minutes represent “what those folks saw at that time, before stocks had gotten to all-time highs and before the latest bad news out of Europe.”
The Dow Jones Industrial Average, which hit another high yesterday, was up 129 points by noon today and pushing 15,000 — no surprise to him.
“The markets are now taking all news as good news,” Mr. Canally said. “It’s the animal spirits, and greed is taking over.”
Even though the Fed minutes indicated that some governors support reducing the bond-buying policy, the latest economic data probably will lead to some revised opinions, Mr. Canally said.
“My guess is after Friday’s jobs data, they will probably want to do more easing,” he said. “Since the March meeting, the Fed has been out publicly detailing exactly what they’re looking for from the economy.”
Although the U.S. stock market has been on a steady climb and the housing market is seen as entering a solid recovery phase, there also are a lot of negative data that should give investors pause, Mr. Fantozzi said.
“We’re dumping $85 billion a month into the markets and that’s what is keeping the markets strong,” he said. “If you look at everything, we’re just balancing right now between good and bad data.”
Mr. Fantozzi cited the recently revised gross domestic product data showing the U.S. economy growing at 0.4%, which is well below the healthy and targeted growth rate of between 3.5% and 4%.
The sluggish pace is exacerbated by the 2013 tax hikes, which are estimated to add a 1.5% drag on GDP.
“Bank lending is still very, very tight, and there is also the cost of new regulations and Obamacare that nobody can figure out,” Mr. Fantozzi said. “That’s the restrictive drag on the economy and why we’re not growing at 4% like we’re supposed to be.”

Related Topics: Federal Reserve