Don’t Fear the End of QE

The markets have been quite volatile this week over the anticipation of how Ben Bernanke and the U.S. Federal Reserve will implement the tapering of stimulus currently being injected into the U.S. economy; through its bond purchasing policy.

The current market volatility is due to the fear officials will start raising interest rates soon after the stimulus ends.  “But that is not how the situation would play out” says Michael Gregory, senior economist at BMO Capital Markets.  “Historically, there’s approximately a year between the end of QE (stimulus) and the raising of rates” since officials tend to wait until the economy starts to gain momentum before raising rates.

The Fed has also stated that it plans to keep interest rates low long after it ends purchasing bonds, which will allow for the economy to recover.

In the U.S. right now, the housing sector is the main driver of the economy, this is because it is creating job growth.  Furthermore, people are starting to take out mortgages again to purchase homes rather than just to refinance their existing properties. “While we don’t have consistent job growth right now, we’re getting there.  We could be in a much better situation in a matter of months.” says Gregory.

After The Federal Open Market Committee wrapped up its monetary policy meeting on Wednesday, Bernanke did suggest he would start tapering stimulus once the unemployment rate reached 7% and inflation increased from its current 1% to 2%. 

So, the Fed might stop stimulating the U.S. economy early next year, but we probably won’t get an interest rate increase until the end of 2015. 

What’s more, Gregory points out that the current level of inflation has “been surprising since its movement has been so slow.  This relates to how retailers have been pricing their products, given they’ve been worried about issues such as the so-called sequestered spending cuts in the U.S.  They’ve been cautious and have been limiting the price increases they pass though to the consumer.”

In fact, “they’ve been cutting prices and that’s put a lot of downward pressure on inflation.”  But he points out, “The good news is; the more favorable the low inflation environment becomes, the less likely the Fed will increase interest rates.”

So, while the end of QE might cause short-term volatility in the markets, the fact the economy is improving is great news.  Interest rates may start to go up in 2015, but the economy will be able to handle it.

For now, investors should remain levelheaded. The end of QE is good news, it means the U.S. economy has recovered and can sustain growth without government intervention.

Have a great weekend, we are officially into summer!

Tracey

 

Source:  Advisor.ca, article by Katie Keir posted 06-19-13