Support the Wall Street Examiner! Choose your level of support to receive a free proprietary report as my thanks. Click the button below to see your options. Become a Patron!

US monetary policy moving in the right direction

This is a syndicated repost courtesy of Sober Look. To view original, click here. Reposted with permission.

The Fed struck a somewhat more hawkish tone today – certainly enough to spook the markets. Expectations for the first rate hike have shifted forward by nearly a quarter, pointing to late spring of 2015 as the starting point.

This monetary stance, combined with another $10bn taper was the right move. Here are the reasons:

1. The $10bn cut per meeting removes much of the remaining uncertainty around taper trajectory. The reductions are on autopilot. Often it’s not the policy itself but the uncertainty surrounding it that creates issues for the economy. That was one of the key problems with this open-ended QE – the fear of a painful exit put the economy on hold.

2. It is unclear if extremely low rates stimulate credit growth at all, and in fact some argue it could be the opposite. At the same time, savers, including many retirees, have been punished by negative short term real rates for years. This zero rate policy needs to end.

3. The US economy is stronger than is commonly believed. “How dare you say that, you heretic – don’t you read all the financial blogs?” That has been the response from many. Perhaps. But it may behoove some folks to pay attention to the data … More on this later. The point here is that the US economy will be fine without QE and with higher interest rates.

4. The current environment has created such hunger for yield that investors are increasingly taking higher risk in order to target the same performance they experienced in the past. Insurance firms, pensions, individuals – the behavior can be seen in a number of areas. The Fed’s exit should help adjust some of the distortions.

 

SoberLook.com

From our sponsor:

Wall Street Examiner Disclosure: Lee Adler, The Wall Street Examiner reposts third party content with the permission of the publisher. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler, unless authored by me, under my byline. I curate posts here on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. Some of the content includes the original publisher's promotional messages. No endorsement of such content is either expressed or implied by posting the content. All items published here are matters of information and opinion, and are neither intended as, nor should you construe it as, individual investment advice. Do your own due diligence when considering the offerings of information providers, or considering any investment.

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.