Poker Bluff Called: US Federal Reserve Balks at Taper

I have been saying so. The supposed taper talk, like all the rest of “exit” talks since 2010, has all been but a poker bluff.

Given the entrenched dependency relationship by the mortgage markets and by the US government on the US Federal Reserve, the Fed’s QE program can be interpreted as a quasi-fiscal policy whose major beneficiaries have been the political class and the banking class. Thus, there will be little incentives for FED officials to downsize the FED’s actions, unless forced upon by the markets. Since politicians are key beneficiaries from such programs, Fed officials will be subject to political pressures.

This is why I think the “taper talk” represents just one of the FED’s serial poker bluffs.

The US Federal Reserve today called the bluff. The FOMC announced that they will refrain from tapering until supposed evidence will warrant it.

From Bloomberg:

Chairman Ben S. Bernanke and his policy making colleagues refrained from paring record accommodation as rising borrowing costs show signs of slowing the four-year expansion. Treasury yields have jumped since May, when Bernanke first outlined a possible timetable for a reduction in the asset purchases.

“The Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases,” the Federal Open Market Committee said today at the conclusion of its two-day meeting in Washington. While “downside risks” to the outlook have diminished, “the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement.”

The FOMC has been debating how to scale back its $85 billion in monthly purchases of Treasury and mortgage debt aimed at stoking economic growth and reducing unemployment that was 7.3 percent in August. The Fed has held the main interest rate near zero since December 2008 and pushed its balance sheet to a record $3.66 trillion through three rounds of bond buying.

The so-called awaiting for "more evidence that progress will be sustained" seems like forever waiting for Godot who never arrives. 

The global system has been acutely hooked on steroids which will only be given up when forced upon by the markets. Such dependency will even be more entrenched.

Such actions by the FED also runs in contradiction to supposed claims of economic recovery as the Zero Hedge rightly observed (italics and bold original)

It seems the Fed is so scared about something (despite every long-only asset manager telling us day after day that the economy is recovering and the US doesn't need crisis support... oh and can withstand higher rates) that they have gone against consensus and decided that Tapering now is premature:

• *FED REFRAINS FROM QE TAPER, KEEPS MONTHLY BUYING AT $85 BLN
• *FED: RISE IN MORTGAGE RATES, FISCAL POLICY RESTRAIN GROWTH
• *FED: `TIGHTENING OF FINANCIAL CONDITIONS' COULD SLOW GROWTH
• *MOST FED OFFICIALS SEE FIRST INTEREST-RATE RISE IN 2015
  

And since FED policy represents a subsidy or transfer of resources to Wall Street and the government diverted from the main street, the economy will hardly post a robust real recovery. And worse, such transfers encourage malinvestments and consumption of capital.

 

Naturally markets addicted to the FED steroids went into a bacchanalia. 

The markets has turned into a full Risk ON mode

The taper bluff reinforces the record run for the S&P 500

…and similarly a near record for the Dow Jones

The manic phase of the US stock market bubble continues to balloon and should do so over the interim. This should resonate to stock markets around the globe.

The calling of taper bluff saw a big rally in US Treasuries (Yields of 10 year notes fell).

Even depressed prices of gold posted a huge one day reversal of 4.22% gains.

Rising stocks, bonds and commodities is an expression of a full risk ON mode.

QEternity in September 2012 had a 3 month effect of the tempering of bond yields. I believe that today’s confirmation of QEternity will have a shorter duration of impact. In other words, the bond vigilantes will be having a short vacation but they will back soon, perhaps in less than a month.

The vacation break by the bond vigilantes will allow for a short term continuation of the risk ON mode.   Yes current environment transforms the market into short term punters given the wild volatilities in either direction.

Nevertheless as market bubbles inexorably inflate, which will be pumped up by even more credit, markets risk will correspondingly surge.

Trade cautiously.