Tuesday, May 14, 2014
Comments from Philly Fed President Charles Plosser would likely keep the spotlight on the Fed’s QE program in today's trading session. Mr. Plosser is part of the hawks on the FOMC that have been arguing for scaling back the pace of bond purchases before stopping the program altogether. The future of the QE program has been in the headlines since the weekend article in the Wall Street Journal that discussed the Fed’s plans to map an exit strategy. Mr. Plosser favors the reductions in bond purchases to take effect now, ahead of the program’s end at a future date.
Is this a trial balloon by the Fed to prepare the market for the eventual changes to the program or the wishes of FOMC hawks who have long been arguing along these lines?
Hard to tell at this stage. But the reality is that the Bernanke Fed justifiably takes pride in its transparency and unambiguous communications. And they would take their time in preparing investors for the long-anticipated changes. The reality is that as extraordinary as the QE program has been in its size, scope and market impact, the unwinding process will be even more significant. One could envision the Fed stopping the bond purchases at some future date, but letting its balance sheet shrink back at a slow and methodical process over an extended period of time through natural maturities.
This is an extremely useful debate given the centrality of the program to the market's gains. And the debate may be timely as well. After all, the economy seems to chugging along just fine, with momentum in housing appearing to offset some of the headwinds from the payroll tax increases and the budget sequester. At least that’s what some of the more recent data, like Monday’s Retail Sales numbers, seem to suggest. We have plenty of important economic data on tap later this week that will shed more light on the economy.
The Fed’s goal will be to change the program without materially disrupting the market. Market disruptions mean sudden changes to interest rates, foreign exchange rates, and the values of other asset classes. But it's hard to envision the stock market hanging on its recent gains in the absence of an active QE program. I have long been of the view that the stock market's record level is not reflective of fundamental realities. As such, most of the recent gains will not be sustainable in a world after QE.
Director of Research
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
More From Zacks.com
- Personal Investing Ideas & Strategies