Outgoing Fed Chairman Ben Bernanke says the Fed will continue quantitative easing for as long as needed. However that might not be enough to keep control of the bond market.
Great news for green ink suppliers: The Fed might be buying up your inventory.
In a speech to the National Economists Club, Federal Reserve Chairman Ben Bernanke said the Fed's easy-money policy will continue until "well after" the official unemployment rate falls below 6.5%. Translation: The Fed is going to keep throwing dollars into the economy for some time to come.
Unemployment rate hasn't been below 6.5% in the past five year. After peaking at 10% in October 2009, it has fallen to its current level of 7.3%. The Fed's two mandates are to keep both inflation and unemployment low.
However, the labor force participation rate – the percentage of those who can work with a job – has dropped from 66% in October 2008 to 62.8% last month. That's the lowest it's been since 1978.
Over the past five years, the Federal Reserve Bank has been undertaking a bond-buying stimulus policy known as "quantitative easing" ("QE"). The Fed has thus far added $4 trillion to its balance sheet in the last half-decade. The Fed's third and most recent round began in September 2012. It involves buying $85 billion per month in US Treasury and mortgage bonds.
Though this latest round of easing is frequently referred to as "QE3", some critics have labeled it "QE-Infinity" because there is no set end date to it. Bernanke's recent comments – coupled with the nomination of "dovish" Fed Vice Chair Janet Yellen to replace Bernanke – have added fuel to the criticisms.
CNBC contributor Gina Sanchez, founder of Chantico Global, thinks there's a possibility of tapering QE3 in the coming months.
"I think it's going to be very data-dependent," says Sanchez. "There was incredible anticipation in the summertime that a taper was imminent. It turned out the data came in quite a bit softer and gave the Fed the ability to continue to be accommodative. Now we're facing the opposite expectation which is now people are expecting QE forever."
Sanchez sees the improved retail sales numbers as perhaps more of an indication of the economy's health than the labor-force participation rate. According to her, stronger data beyond unemployment may be a reason for tapering, even if it doesn't necessarily end QE outright.
But, according to Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson, the technicals point to higher rates no matter what the Fed does to try to control the bond market.
"What I see right now tells me that those rates are going higher," says Ross. "Perhaps they're not going to skyrocket, but I do see the trend moving up in terms of lower bond prices and higher bond yields."
Ross sees rates as breaking above its six-year downtrend and testing the 3% mark again as it did two months ago.
To see the rates Ross sees coming in 2014 and to hear the rest of Sanchez's take on what the Fed will do next, watch the video above.
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- Budget, Tax & Economy
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- quantitative easing