The financial markets were in distress lately because of Fed Chairman Ben Bernanke’s suggestion that the Fed might taper off its quantitative easing programs starting at the end of this year and ending in 2015. Here are five reasons why markets shouldn’t worry too much about the Fed leaving the stage:
So writes Nico Inberg (http://www.aandelentipper.nl/) in edited excerpts from his original article* as posted on SeekingAlpha.com under the title 5 Reasons Why The Fed Can’t Stop Buying Treasuries.
[The following article is presented by Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com and www.munKNEE.com and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]
Inberg goes on to say in further edited excerpts:
2) Banks can’t survive without low interest rates The low interest rate at which banks attract money enables them to make a huge profit on their daily business. Mortgages and loans to individuals and companies are very profitable now for the banks and this is very welcome in order to shore up their Tier-capital to acceptable levels.
3) Governments can’t survive without low interest rates …[Were] the Treasury yield to go back to 4%, which used to be quite normal, America and dozens of…[other] countries would have to economize in such a way that…[their economies] would turn into recession, if not depression, immediately.
4) Economic recovery is far from convincing …Economic growth is still weak. What will happen when banks all of a sudden have to pay real money for the billions they borrow from the Fed? In Europe, the situation is even worse. Hundreds of European banks depend on the cheap money from the ECB. While the ECB is not easing in a way the Fed or Japan does, it does lend hundreds of billions every month to a large amount of banks across the eurozone.
5) What will happen to the Fed’s balance sheet when interest rates start rising? This year, Frederic Mishkin, James Hamilton, David Greenlaw and Peter Hooper published “Crunch Time: Fiscal Crises and the Role of Monetary Policy,” an 86-page paper that predicts [that]…rising interest rates will cause huge losses at the Fed, which may in turn tip the U.S. into an unsustainable deficit spending path [and that, as such,] the Fed should therefore first stop reinvesting the received interest and build up a reserve balance sheet in order to counter the losses that appear when (especially the longer term) interest rates will rise.
[Given the above,] there is every reason for the Fed to NOT stop the easing programs. It more or less looked like Mr. Bernanke was testing the markets to see what would happen if he really would stop easing. Now that he knows that real interest rates will rise, we should expect the Fed to delay its tapering plans at least a few years.
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
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