WORLD BRACES FOR END OF FED'S 'EASY MONEY'
International community can't handle surging dollar, new rise in interest rates
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NEW YORK – With the Obama administration issuing rosy economic reports that WND has reported are based on manipulated statistics designed to show GDP growth at 5 percent and unemployment at under 6 percent, economists worry about the impact of the end of the Federal Reserve’s Quantitative Easing, the buying of U.S. Treasury debt.
“America’s closed economy can handle a surging dollar and a fresh cycle of rising interest rates. Large parts of the world cannot. That in a nutshell is the story of 2015,” warned Ambrose Evans-Pritchard, the well-respected International Business Editor of the Telegraph in London.
“Tightening by the U.S. Federal Reserve will have turbo-charged effects on a global financial system addicted to zero rates and dollar liquidity.”
Supporting his concern, yields on 2-year U.S. Treasuries have surged from 0.31pc to 0.74pc since October, and this is the driver of currency markets.
Under the leadership of Federal Reserve chair Janet Yellen, the Fed has engaged in a “pivot,” shifting concern from stimulating job growth to worrying about inflation, with the concern that without a tightening in Federal Reserve monetary policy, the U.S. economy could experience inflation as high as 5 percent in the next two years, a level not experienced in the U.S. economy since 2005.
In October 2014, the Fed under Yellen’s direction ended the policy of Quantitative Easing under which the Federal Reserve had purchased $85 billion in Treasury bonds every month in 2013, the culmination of what turned out to be 37 consecutive months in a row during which the Federal Reserve bought Treasury debt in an effort to stimulate the economy by keeping interest rates at or near zero.
Under the QE bond-buying spree, the Federal Reserve balance sheet ballooned to a record $4.48 trillion accumulated since announcing the first round of QE purchases in November 2008 just as outgoing President George W. Bush tried to deal with a systemic financial markets collapse.
The moves then helped propel Barack Obama into the White House as the housing market bubble fueled by speculative mortgages issued below investment grade collapsed.
Yellen assumed the Fed chair on Jan. 6, 2014, determined to “taper” QE borrowing down to zero by the end of 2014, a goal Yellen achieved last October.
WND has repeatedly warned that a massive downward stock market collapse in the United States could trigger an international stock market downward adjustment if interest rates begin to rise in the wake of discontinuing the Fed policy of QE Treasury debt-buying.
With the Dow Jones Industrial Average topping 18,000 for the first time ever at the end of 2014, savvy investors are asking whether the U.S. economy is headed toward a bad case of déjà vu.
After 9/11, Greenspan and the Federal Reserve began cutting interest rates aggressively in an effort to jump-start a badly shocked U.S. economy back into robust activity.
“For a full year and a half after September 11, 2001, we were in limbo,” Greenspan wrote in his 2007 book “The Age of Turbulence: Adventures in a New World.”
“The economy managed to expand, but its growth was uncertain and weak. Businesses and investors felt besieged,” Greenspan wrote.
Greenspan was open about monetary policy during this time.
“The Fed’s response to all this uncertainty was to maintain our program of aggressively lowering short-term interest rates,” he wrote.
Under Greenspan’s direction the FOMC extended a series of seven cuts made in early 2001 to lower the fed funds rates down to around 1.25 percent by the end of 2002, a figure Greenspan admits “most of us would have considered unfathomably low a decade before.”
Greenspan admitted that the Fed was aware maintaining these low interest rates “might foster a bubble, an inflationary boom of some sort, which we would subsequently have to address,” but he claimed the Fed was worried the economic slowdown after 9/11 might cause deflation, a worry of professional economists around the world after experiencing the deflation that plagued the Great Depression of the 1930s.
As 2007 came to a close, Greenspan was a hero on Wall Street.
Investors who had made billions of dollars hailed Greenspan’s low interest policy as the key to engineering an unprecedented surge of wealth on Wall Street.
At the close of 2007, those warning that the economy had peaked and the real estate bubble had already burst were being received as prophets of doom whose ill tidings risked spoiling the party.
As 2008 began, pundits were predicting the DJIA would climb past 15,000 without much difficulty.
Unfortunately, such optimism was unfounded, as Greenspan and the Fed managed the federal funds rate up from a low of 1 percent in May 2004 to a plateau of 5 percent maintained for a year, from the last quarter of 2006 until approximately the last quarter of 2007, when Greenspan and the Fed began lowering rates in fear the upward adjustment violated the Goldilocks rule in being “too much” instead of “just right.”
In December 2007, few realized that month would later be identified as the official start of the most severe economic downturn in U.S. history since the Great Depression of the 1930s.
Read more at http://www.wnd.com/2015/01/world-braces-for-end-of-feds-easy-money/#M6XxEym3BOJsvEz4.99
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