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Fed Announces "No Taper"

9/22/2013

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Why is this such a big deal?  The fact that we have QE (Quantitative Easing) in the first place is mind boggling, so it's a little hard to wrap my brain around the fact that we have such an enormous program in place, let alone the fact that it needs to be tapered down now.  With a harmless name like QE, it's not surprising that the average American doesn't realize the significance of the program.  It should be called "Monopoly Money Printing Government Spending Program 1.0" to the tune of 85 Billion per month.  This money is being spent, by the government every month, and this is what has been propping up the US economy and developing economies around the world.  That's no small sum people.  Based on many financial indicators, the economy is on the mend.  Unemployment is down, stocks are way up, corporate profits are way up too, so this just leaves a few possible reasons as to why the Fed would continue the Bond buying program - Interest rates and the housing market.  Shortly after July 4th of this year, when Ben Bernanke casually mentioned that the tapering would have to occur when the time was right, the Bond market went crazy.  This forced yields on Treasury Bonds higher, and drove up real estate interest rates with them.  Average interest rates went up almost 100 basis points which is the equivalent of going from 3.5% to 4.5% on a similar loan product.  This rise in interest rates immediately killed the refinance market and put a slight dampener on real estate sales.  Realizing the sensitivity in the marketplace, Mr. Bernanke in his Fed meeting last week carefully decided to "stay the course", leaving many scratching their heads.  Many analysts predicted some sort of taper. This great experiment is exactly that, an experiment, and we don't know how it's going to turn out.  So far it has helped prop up the US economy, preventing the hard landing which the Financial Meltdown would have caused (that was a soft landing believe it or not).  It hasn't caused the massive inflation that some predicted earlier, disappointing a lot of gold investors, but I also don't think it has performed quite as Mr. Bernanke had hoped it would.  The big question going forward may very well be this:  how will the Fed delicately exit this program without creating too much disturbance in the marketplace?  It's going to be a very interesting thing to watch unfold, and all of us have front row seats.  Let's hope this great experiment has a happy ending.  Let's hope for a smooth transition during the taper, because we all know that it is going to happen sooner or later.  The thing that remains unclear is how the world and US economy will look when it's gone.     
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    Mark Cato is the owner/broker of North Valley Mortgage. 

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