Jon Hilsenrath, a well-respected reporter for the Wall Street Journal, made big waves over the weekend with a report saying, “Federal Reserve officials have mapped out a strategy for winding down an unprecedented $85 billion-a-month bond-buying program meant to spur the economy.”
OK, now that the grenade has been thrown out there … everybody just relax.
Here’s the takeaway: The Fed is not pulling the plug anytime soon, and the drawdown of bond-buying is ultimately a good thing for the fiscal solvency of the country and the economy at large.
Consider that on Monday morning, the major indices erased their before-the-bell losses on unexpectedly strong retail sales. Another positive economic data point in a long string of numbers is precisely why the Fed is considering an exit strategy. It’s not like the Fed floated this balloon when we still had double-digit unemployment, or is considering an exit as housing prices plummet.
Personally, I think the revelation is noteworthy because of what it says about where the U.S. is at right now, and how far we’ve come.
For the first time since the financial crisis, there is actually serious talk about the economy getting its act together in the next year or so. With inflation very much under control and the unemployment rate slowly edging down toward that 6.5% unemployment target set last year by Ben Bernanke and the Federal Reserve … it’s not insane to think we might not need QE in 2014.
That’s not to say that there won’t some hiccups along the way, delaying the drawdown of stimulus. But don’t worry about this plan alone gutting the stock market — today, tomorrow or a year from now.
Because ultimately, the end of QE will be a sign that the economy can finally stand on its own two feet.
The initial reaction about Hilsenrath’s column was unsurprising. The end of bond-buying, zero-interest-rate policy and other monetary stimulus creates challenges for investors because it naturally will affect capital markets in a big way.
But anyone who has read either the minutes of the Federal Reserve or any column by Hilsenrath — including Friday’s report — should know that loose monetary policy will remain in place for many more months to come and that the end is not nigh. There’s plenty of time to adapt your strategy and for the markets to bake in this news.
Furthermore, everyone should have known that QE was going to end eventually. Contrary to what some Fed haters say, it was never intended to prop up the economy in perpetuity.
Like I said, strong data has prompted serious talk from Bernanke & Co. about the end of loose monetary policy. Presuming the numbers stay good, we should have nothing to fear from the Federal Reserve because the organic power of the American economy and U.S. stock market will ramp up to fill any void in the next year or two as the program starts to wane.
That’s as it should be. So just relax and keep calm. The market will adapt, and the Fed will give it plenty of time to do so.
And if the timeline is accelerated? Well, it would take a breakout in the economic data to prompt such a fast move — and that wouldn’t be cause for panic, either.
- Get all the details from Hilsenrath’s initial column. (WSJ)
- Great take from Josh Brown here about how the end of QE is actually the beginning of something new. (The Reformed Broker)
- Cullen Roche warns of overreaction to the exit strategy. (Pragmatic Capitalism)
- Not to confuse the Fed haters, but Mark Dow points out there is no real correlation between the Fed “printing money” and actual money supply. (Behavioral Macro)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.