Chillin' out till it needs to be funded
One need not remind our readers that we do not think half as optimistically as the fed seems to have indicated yesterday. one expected an end 2013 calendar beginning for withdrawals but a 7% unemployment rate as trigger is definitely a sign of the nine month phased withdrawal being more a fait accompli also because of the hawkish prognostications earlier in regard to excess liquidity having weighed on Ben Bernanke and/or the carrying vote for the FOMC depending on your school of decision sciences. Bernanke sounded sure all QE would be of the table ( as far a new purchases and reinvestment are concerned ) by mid 2014.
Deflation risks are increasing
That deflation is still a risk despite the Fed not believing it is clear from the Global crash and burn in early morning trades , mirroring the same mistake as the pre LTRO exits. Bernanke has also promised a continuing stimulus if growth is threatened but his triggers for the withdrawal indicate a disconnect from the global conditions aka Brady and the others who think liquidity is already a problem
One must note that the reactions in Asia and India are extreme and disconnected from the Global market reaction, because of the hurry of prioritising exits in the case it happens tomorrow.
Increasing structural unemployment not a good enough excuse
The triggers on the employment rate at just 7% are too close to call as the Street expected after Bernanke’s recent pronouncements that the Fed will wait for good news and the street expected the trigger to be deeper at 6.5% The last few employment reports highlight those unemployed more than 27 months to be 4.5 billion and they have been added to the structural unemployment in these expectations already meaning their recovery will proceed at the ace of 80k/150k per month aditions to employable quorum as per BLS depending on March/May averages as researched by our colleagues across the world, at best taking 30 months to absorb this number itself while a 15 cut that would take care of cyclical unemployment as the Fed Chair mentioned to the Brady committee will take probably 10 more months from today, making mid 2014 the time to start off QE withdrawals
They cannot be expected to return to full time employment and only limited part time employment and that was part of the 7% unemployment target but is a point of disconnect between a Fed hurry to start off the exit probably before Bernanke hands over to Janet Yellen or any other worthy at the Fed where priorities may shift towards community banking and other important unattended items during the heydeys of the crisis
What recovery? The modest recovery expected has already been threatened and the rising interest rates without demand are not helping
AS such, recovery is ill paced and yet further stunted by the Fed’s seeming rush for intemperate action, and as others have highighted China’s recovery as a major risk, one would add also the permanent demit of Europe and the non recovery of Japan(completing the G3) from the global equation and the fluttering consumption and credit conditions not just in resource economies dependent on China but those who were riding under their own steam in Thailand, Turkey, Mexico and India and would be commonly prioritised for fund exits from global funds dependent on QE liquidity
That hit to global recovery may also affect the Fed’s decision to ignore its own healthy inflation target as Bernanke seems to have given in to any inflation as long as it is not deflation as the sign of full recovery much like the $70 trillion household wealth mark reached on the Federal Balance Sheet which has been treated as the finality of recovery. Earlier analyses in 2012 have already shown that the Housing market and the overall consumption economy are currently not even recovered one third after their fall from the 2006-07 bubble levels
The Fed quoted thus
Partly reflecting transitory influences, inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.
which is a misnomer given that the sudden rise in yields over the last 6 weeks has already been recognised as hurting bank portfolios and bringing a deflation squeeze closer and inflation is barely positive. in fact Achuthan’s ECRI leading indicators have been looking at a recession for some time now and without QE the same may engender the reaction required to et things rolling for both US and Europe
The FOMC statement continues to target 6.5% unemployment and 0-0.25% Funds rate which will remain til November 2015. James Bulard among the voting members voted against the FEd action yesterday showing that the market will have to wait for minutes to find out how many really did not want to back the current spate of low inflation and deprioritise QE withdrawal