The Fed yesterday came out with a September surprise: Forget the “tapering” of bond-buying it said for three months was coming. Instead, it will continue the “quantitative easing” that is central to its easy monetary policy. This shocked both stock market participants and analysts, and contributed to a short-run market surge that will bring long-run problems.
Why? Why would the Fed know that the capital markets were fully prepared to absorb a $10 billion tapering of this bond buying, and then not even do that? This was a golden opportunity to begin some very, very mild restoration of sound monetary policy—so why did the Fed once against coddle the housing market by keeping interest rates unsustainably low?
I’m not criticizing the motives of Fed Chairman Ben Bernanke, who seems to be consistently applying the principles he believes in—but those principles are paving the road to deep trouble. I assume Fannie Mae and related policymakers are applying extreme pressure to sustain the steroids the Fed injected into the housing market prior to the summer of 2013. The mere expectation of modestly higher rates caused enough of a slowdown to housing momentum that I believe the Fed chickened out. This is very disappointing, because the Fed knows that the day of reckoning has to come. No “housing recovery” can be considered real when it cannot even sustain the modest tapering of a bizarre Fed bond-buying program.
I am not one who believes QE3 is going to lead to hyperinflation—it is not. Worse, QE3 is simply worthless. It’s building excess reserves in the banking system that serve as no catalyst to economic growth. The tool the Fed is holding on to for dear life is whatever will work to provide the appearance of health and momentum in the housing market. So as we sit here on the fifth anniversary of ground zero to the biggest financial crisis since the Great Depression, one caused by a cult of housing market obsession, it’s sad that the Fed appears to be clinging to the same misguided thinking.