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Strategies & Market Trends : Dino's Bar & Grill -- Ignore unavailable to you. Want to Upgrade?

To: Goose94 who wrote (3761)	12/21/2013 5:00:31 AM
From: Goose94	Read Replies (1) \| Respond to of 202719

Gold: Fasten On Your Seat Belt, The Fed's Exit Strategy Could Be Bumpy - kitco.com So the Fed started tapering, no surprise really. But, the really hard stuff lies ahead. As Federal Reserve Chairman Ben Bernanke readies the baton to pass it over to Janet Yellen, the new Fed chairwoman will face uncharted waters as she leads U.S. monetary policy back to normalization. The U.S. federal funds rate has sat at zero to 0.25% since December 2008 and the Fed's balance sheet has climbed from $850 billion before the global financial crisis to nearly $4 trillion now. Additionally, $1.9 trillion in bank funds are parked at the Fed earning a 0.25% rate—the IOER, or interest on excess reserves rate. Looking ahead, Yellen needs to wind back this historic, unprecedented accommodative monetary policy and even long-time market watchers warn this will be a difficult task even for a talented team of central bankers. A spike in interest rates and rising inflation are the two key risks ahead for the Fed as they navigate back toward policy normalization. If the Fed tightens policy too early, there is the risk the economy slows back down. If the Fed tightens too late, there is the risk of asset bubbles, financial dislocations and rising inflation. Just like Goldilocks and her porridge, the Fed will have to get it "just right" and that could prove difficult. Yellen may face additional challenges including political pressure from Washington regarding the independence of the Fed via the proposed "Audit the Fed" bill in the Senate. Internally, Yellen could face challenges of discord among committee members. The Federal Reserve has had one policy for the last several years—zero to 0.25% federal funds rate and massive quantitative easing. Now, the timing of an eventual rate hike could become a contentious issue. On the public front, Yellen will need to rise to the key communication challenges that now are part of a Fed Chairman's duties—press conferences, forward guidance, attempting to telegraph to the market's the Fed's moves and what they mean. Meanwhile, the banks are sitting on $1.9 trillion in excess reserves. With expectations that U.S economic growth could pick up toward 3.0% or even higher in 2014, will banks get the itch to start lending those funds? The Federal Reserve certainly wants to keep a tight lid on those excess reserves. The definition of inflation is too much money chasing too few goods. There are forecasts the Fed will increase the IOER, as it ratchets higher the funds rate, to increase the incentive for those banks to keep their funds parked at the Fed. "The central bank has never engaged in so much unconventional highly accommodative policy. The Fed has never seen a balance sheet approaching 4 trillion. The new chairman Janet Yellen and Stanley Fischer as vice chairman—even for those two with all their experience, the exit strategy will be a major challenge," said David Jones, president of DMJ Advisors LLB, and long-time market watcher with 35 years on Wall Street. "It is fraught with danger and you could see extreme market volatility. "Inflation is always a risk," Jones added. "Think of a scenario where the economy picks up more strongly than expected and we see wage and price pressures. It could force the Fed to act earlier than it expects, which could lead to financial market instability." Or, on the other side of the coin, what if the Fed waits too long to hike rates? Yellen is a known dove, and her research has focused on the benefits of keeping the fed funds rate near zero to support the under-employment situation. "If the markets feel they've left rates at zero for too long, it could send 10-year Treasurys above 3.5%. If the market feels the Fed is getting behind the curve and it's time to start normalizing, rates on 10-year Treasurys could push higher," said Chris Rupkey, managing director, and chief financial economist at Bank of Tokyo-Mitsubishi. While Bernanke may have been the Fed chairman on a white horse that saved the U.S. from a second Great Depression, there is still a long road back to policy normalization. And, that road could be bumpy. Pointing to the handover to a new Fed chair, especially at such a critical time in monetary policy history, Rupkey concludes, "It's a big change. It may be bigger than the market is expecting." Fasten on your seat belt. The next year is going to be interesting.