Fed to Sell Assets and Delay Rate Hikes

Fed to Sell Assets and Delay Rate HikesWhile yesterday’s Federal Open Market Committee (FOMC) meeting was anxiously awaited by many, the decision of its Board of Governors came as no surprise to veteran market watchers when the minutes of the meaning were released.
The Fed has decided it will sell off its assets – principally Treasury securities and U.S. government-backed, mortgage-related securities.
It will do so not in an aggressive or auctioneering spirit. It will simply roll these securities out of Fed possession on the dates of their expiration. Fed officials will be very guarded about the process, extremely “data-dependent.” The move, after all, amounts to a disentanglement of the central bank’s $4.5 trillion portfolio. And the central bank will have a cap in place for the amount it will let go of each month. Amounts it receives in repayments greater than the established capped amount will be reinvested.
In a controversial move known as quantitative easing, the Federal Reserve had built up its large portfolio in response to the Great Recession of 2008. The Fed’s intention at that time was to lower interest rates and to increase the money supply. Now that the Fed’s Board of Governors clearly sees an easing of the nation’s recessionary difficulties, they feel confident they can safely unwind the central bank’s gargantuan portfolio.
According to former Fed Chief Ben Bernanke and others, the Federal Reserve would be wise to first attend to rate increases before it begins selling off assets. Inhibited lending and deflation were the reasons in the first place for introducing quantitative easing. Now with signs of lower rentals in major metropolitan areas, deflation could begin to surface once more.
The Fed’s challenge is to make sure it doesn’t jump the gun by reversing quantitative easing before it’s clear the nation’s economy doesn’t still need it. Under the circumstances, it remains questionable whether the Fed will raise interest rates in June and September, as many economists expect.
Ben Bernanke points out that, under his stewardship in 2013, when he announced the FOMC was considering slowing down quantitative easing if economic conditions improved, the market responded with a “taper tantrum” – “sharper increases in volatility and a rise in longer-term rates.”
What we ordinarily look for from Fed meetings is guidance, or at least some indication of what the economy is in for. What we’re getting instead from the May 24 meeting is very iffy and provisional.
We now have a perfect economic atmosphere for a gold investor. Are we due for taper tantrum? Or could investor uncertainty lead to a precipitous stock market decline? Economic uncertainty is a natural invitation to a rapid rise in the price of gold, since that’s where unsure investors run to when they feel nervous and unsure.
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