Federal Reserve ends quantitative easing bond-buying program

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Published time: October 29, 2014 18:06

Economy, Government Spending, Markets, USA

The Federal Reserve has officially announced an end to its quantitative easing bond-buying program, but economists are split over whether the central bank’s decision will help or hinder post-recession recovery.

As expected, the Fed said Wednesday afternoon that it’s third and most recent round of quantitative easing, QE3, would come to an end.

“The Committee judges that there has been a substantial improvement in the outlook for the labor market since the inception of its current asset purchase program. Moreover, the Committee continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability. Accordingly, the Committee decided to conclude its asset purchase program this month,” reads part of a statement released by the Fed on Wednesday. “The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.”

The confirmation surprised few since the Fed was largely reported ahead of Wednesday’s decision to be considering making such an announcement. As far as what the result will be, however, is up for debate as economists weigh potential outcomes ranging from outright optimism to doom and gloom.

Combined, the three rounds of QE undertaken by the Fed since 2008 have generated trillions of dollars for the American economy through a process in which the central bank has perpetually pumped money into long-term government bonds and bonds backed by home mortgages. But David Wessel, the director of the Hutchins Center at the Brookings Institution, told NPR recently that the three-and-a-half-trillion dollars’ worth of bonds purchased during that six-year span has been “far more than anybody inside or outside the Fed expected when this all began.”

Indeed, the Fed has twice announced an end to its bond purchasing programs, only to soon after start again when it was realized that the desired effect failed to be achieved. Six years later, though, the end to QE3 might once and for all be the final nail in the program’s coffin.

In 2009, Ben Bernanke, then the chairman of the Fed, said that quantitative easing would only end “when credit markets and the economy have begun to recover,” at which point the central bank would resume business as usual.

“As the size of the balance sheet and the quantity of excess reserves in the system decline, the Federal Reserve will be able to return to its traditional means of making monetary policy–namely, by setting a target for the federal funds rate,” he said. “In considering whether to create or expand its programs, the Federal Reserve will carefully weigh the implications for the exit strategy. And we will take all necessary actions to ensure that the unwinding of our programs is accomplished smoothly and in a timely way, consistent with meeting our obligation to foster full employment and price stability.”

Today, the American economy is statistically sounder than six years ago: not only have three rounds of QE allowed faltering banks to get boost after boost from the government, but, partially as a result, jobless claims are down drastically from post-recession figures.

Nour Eldeen Al-Hammoury (Image from nourhammoury.com)Nour Eldeen Al-Hammoury (Image from nourhammoury.com)

Nevertheless, optimism isn’t universal when it comes to what ending QE3 means for the world economy.

“Well there are some improvements, but we can’t say that it is recovering as everyone hoped,” Nour Eldeen Al-Hammoury, a chief market strategist at ADS securities in Abu Dhabi, told Euro News recently. “GDP is growing based on the inventories, which doesn’t mean that sales are increasing. The slack in the economy remains and so far there is no clear strategy on how this slack will be resolved. Moreover, the slowing down in Europe and Asia will be something to consider as the US economy is unlikely to grow on its own.”

According to Al-Hammoury, markets the world over may suffer as a result of ending QE3. “It is not the Middle East markets only, it is global markets and especially the emerging markets,” he said. “Let’s say, for example, Dubai — Dubai stock market was one of the best performers in the world. However, we will see some more declines at the end of the year. These markets are again sensitive to any events. However, these Middle East markets may benefit again from what’s happening in Europe. I mean the outflow that is happening in Europe and also don’t forget that this region has also opened its doors to foreign investors so with the Fed ending QE we might see some declines again, and if the global slowdown continues, global markets, including the Middle East, may continue with the current downside correction.”

Even in the west, that pessimism is present: Pedro Nicolaci da Costa wrote for The Wall Street Journal this week that the Fed may deploy another round of quantitative easing if the decision to end the third series proved to be unsuccessful, which, according to his report, may be the case.

“Many of the studies of large-scale asset purchases, known as quantitative easing or QE, agree they worked very well to prevent deflation and stabilize the financial system during the 2008 crisis, but disagree about how effective the programs have been in boosting growth since then,” da Costa wrote.

Although Bernanke has attributed QE with cutting unemployment, da Costa wrote, Fed researchers and academic economists have for years studied the practice and are split with regards to how successful the rounds have been, and what the eventual outcome will be when all is said and done.

“I do think they’re overly optimistic,” Barbara J. Cummings of the Boston Private Bank & Trust Company told CNBC this week. “The market and the Fed are definitely saying two different things. And the market is right. It usually is.”

To some, the outcome is even drearier. “Without another dose of stimulus, the US will likely slide into recession,” Worth Wray, chief strategist at Mauldin Economics, predicted to Equities earlier this month.

DOES THIS LOOK LIKE A HOUSING RECOVERY TO YOU?

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We just learned that the homeownership rate in the United States has fallen to the lowest level in 19 years

by MICHAEL SNYDER | ECONOMIC COLLAPSE | OCTOBER 29, 2014

We just learned that the homeownership rate in the United States has fallen to the lowest level in 19 years. But of course this is not a new trend. As you will see in this article, the homeownership rate in the United States has been in a continual decline for more than 7 years. Obviously this is not a sign of a healthy economy. Traditionally, homeownership has been one of the key indicators that you belong to the middle class. When people define “the American Dream”, it is usually one of the first things mentioned. So if the percentage of Americans that own a home has been steadily going down for 7 years in a row, what does that tell us about the health of the middle class in this country?

The chart that you are about to view is clear evidence that we are in the midst of a long-term economic decline. It shows what has happened to the homeownership rate in the U.S. since the year 2000, and as you can see it has been collapsing since the peak of the housing market back in 2007. Does this look like a housing recovery to you?…

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So many people get caught up in what is happening on Wall Street, but this is the “real economy” that affects people on a day to day basis.

Most Americans just want to be able to buy a home and provide a solid middle class living for their families.

The fact that the percentage of people that are able to achieve this “American Dream” is falling rapidly is very troubling.

There are some that blame this stunning decline in the homeownership rate on the Millennials.

And without a doubt, they are a significant part of the story. They are moving back home with their parents at record rates, and many that are striking out on their own are renting apartments in the big cities.

This is one area where the decline of marriage in America is really hitting the economy. Back in 1968, well over 50 percent of Americans in the 18 to 31-year-old age bracket were already married and living on their own. Today, that number is below 25 percent.

But that is not all there is to this story.

In fact, the homeownership rate for Americans in the 35 to 44-year-old age bracket has been falling even faster than it has for Millennials…

In the first quarter of 2008, nearly 67% of people aged 35-44 owned homes. Now the number is barely above 59%. The percentage of people under 35 owning homes only fell five percentage points, to 36% from 41%.
So why is this happening?

Well, it is fairly simple actually.

In order to buy homes, people need to have good jobs. And at this point, the percentage of Americans that are employed is still about where it was during the depths of the last recession.

In addition, wages in the United States have stagnated and the quality of our jobs continues to go down. As I wrote about the other day, half of all American workers make less than $28,031 a year. Needless to say, if you make less than $28,031 a year, you are going to have a really hard time getting approved for a home loan or making mortgage payments.

Things have been changing for a long time in this country, and not for the better. Our economic problems have taken decades to develop, and the underlying causes of these problems is still not being addressed.

Meanwhile, middle class families continue to suffer. One very surprising new survey discovered that more than half of all Americans now consider themselves to be “lower-middle class or working class with low economic security”. While Wall Street has been celebrating in recent years, economic pessimism has become deeply ingrained on Main Street…

Optimism may be harder to come by these days. More than half of Americans surveyed in a Harris poll released Tuesday identified themselves as being lower-middle class or working class with low economic security. And 75 percent said they’re being held back financially by roadblocks like the cost of housing (24 percent), health care (21 percent) and credit-card debt (20 percent).

And that’s not the kicker.

“The most disappointing aspect is that 45 percent think they’ll never get their finances back to where they were before the financial crisis,” said Ken Rees, CEO of the Elevate credit service company, which commissioned the survey. “And a third are losing sleep over it.”
The only “recovery” that we have experienced since the last recession has been a temporary recovery on Wall Street.

For the rest of the country, our long-term economic decline has continued.

When I was growing up, my father was serving in the U.S. Navy and we lived in a fairly typical middle class neighborhood. Everyone that I went to school with lived in a nice home and I never heard of any parent struggling to find work. Of course life was not perfect, but it seemed to me like living a middle class lifestyle was “normal” for most people.

How times have changed since then.

Today, it seems like we are all part of a giant reality show where people are constantly being removed from the middle class and everyone is wondering who will be next.

So what do you think?

Is there hope for the middle class, or are the economic problems that we are facing just beginning?

Biden: In Obama’s Economy ‘The Middle Class Has Been Left Behind’ [VIDEO]

DEREK HUNTER
Contributor

Vice President Joe Biden attended a rally Monday for Iowa Democratic Senate hopeful Bruce Braley and, in talking about the economy, inadvertently slammed the Obama administration as a failure for the middle class.

He praised “55 months of growth and there’s 10 million new jobs,” then he added. “But you know the truth – the middle class is still in trouble, the middle class is still in trouble. You don’t have to know the numbers, you can feel it. You can feel it in your bones.”

“According to all the statistics, all the Economic Policy Institute and all these groups that are outside experts on the economy, the gross domestic product means the nation grew over the last 10 years by over 25 percent, and productivity went up over 30 percent. But middle class wages went up, according to this group, by only $0.14 – $0.14. You know it. You don’t have to know the number, but you know – the middle class have been left behind.”

The Vice President appears to be referring to this EPI study in which the liberal group found:

The weak wage growth over 2000–2007, combined with the wage losses for most workers from 2007 to 2012, mean that between 2000 and 2012, wages were flat or declined for the entire bottom 60 percent of the wage distribution (despite productivity growing by nearly 25 percent over this period).

President Barack Obama and Biden assumed office on Jan. 20, 2009, and had a Democratic controlled House and Senate until Jan. 3, 2011.

CAN’T FIND ANY INFLATION? HERE’S A PLACE TO START

Observations of how “non-existent” inflation is impacting lives of ordinary people

by ZERO HEDGE | OCTOBER 27, 2014

Lately, there has been much anguished consternation, especially among the tenured US economics professors (primarily those who make 6-digits or more per year) and of course, the Federal Reserve where as we revealed last week, at least 113 government workers make $250,000 (excluding bonuses) and thus all are confined within the cozy cocoon of America’s “1%ers”, about the so-called complete disappearance and collapse in inflation. So to help these ivory tower-confined individuals in their holy grail to rediscover the inflation that is more than felt by the rest of America, here are two simple charts.

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And some observations of how this “non-existant” inflation is impacting the lives of ordinary people, those whose net worth does not rise by the same percentage as the Fed’s balance sheet, and thus the S&P500, and are crushed by the inequality with the Fed’s Chairmanwoman is so vocally concerned about.

“Our paychecks stay the same, but the food prices keep going up,” fumed Jody O’Toole as she shopped at the Associated Supermarket at Eighth Avenue and 14th Street. “You still gotta feed your family, but meat and milk are too much.”

Colleen Vincent, who lives with her mother in Brooklyn, said she’s avoiding meat and sticking to canned goods and cabbage, which she turned into three meals last week.

“I don’t do big grocery shopping trips anymore,” said Vincent, 37. “I have to buy something that gives me more bang for my buck.

“We used to buy beef — now it’s a special treat,” she added. “There are other things I want out of life. I don’t want to spend everything on food.”

Steve Gould, 68, was picking up seltzer water, bananas and yogurt and said he refuses to buy anything unless it’s on sale.

“I want people to stick their heads out the windows like they did in the movie ‘Network,’ and say, ‘I’m mad as hell and not going it take it anymore,’ ” Gould said.
But how is it that food inflation of over 20% in some cases is so crushing to ordinary Americans and yet the people who are tasked to isolate and remedy precisely such problems are completely oblivious to its impact?

The answer is simple: “Janet Yellen, the No. 2 at the Fed’s Board of Governors, and her husband—Nobel Prize-winning economist George Akerlof —had assets such as stocks, bond-fund shares and bank accounts valued at roughly $4.8 million to $13.2 million in 2012, according to financial disclosures released by the Fed on Tuesday.”

HOW WILL THE STOCK MARKET REACT TO THE END OF QUANTITATIVE EASING?

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It is widely expected that the Federal Reserve is going to announce the end of quantitative easing this week

by MICHAEL SNYDER | ECONOMIC COLLAPSE | OCTOBER 27, 2014

It is widely expected that the Federal Reserve is going to announce the end of quantitative easing this week. Will this represent a major turning point for the stock market? As you will see below, since 2008 stocks have risen dramatically throughout every stage of quantitative easing. But when the various phases of quantitative easing have ended, stocks have always responded by declining substantially. The only thing that caused stocks to eventually start rising again was a new round of quantitative easing. So what will happen this time? That is a very good question. What we do know is that the the performance of the stock market has become completely divorced from economic reality, and in recent weeks there have been signs of market turmoil that we have not seen in years. Could the end of quantitative easing be the thing that finally pushes the financial markets over the edge?

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And of course the chart above tells only part of the story. Since April 2013, the S&P 500 has gone much higher…

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After all this time, many Americans still don’t understand what quantitative easing actually is. Since the end of 2008, the Federal Reserve has injected approximately 3.5 trillion dollars into the financial system. Of course the Federal Reserve didn’t actually have 3.5 trillion dollars. The Fed created all of this money out of thin air and used it to buy government bonds and mortgage-backed securities.

If that sounds like “cheating” to you, that is because it is cheating. If you or I tried to print money, we would be put in prison. When the Federal Reserve does it, it is called “economic stimulus”.

But the overall economy has not been helped much at all. If you doubt this, just look at these charts.

Instead, what all of this “easy money” has done is fuel the greatest stock market bubble in history.

As you can see from the chart below, every round of quantitative easing has driven the S&P 500 much higher. And when each round of quantitative easing has finally ended, stocks have declined substantially…

And of course the chart above tells only part of the story. Since April 2013, the S&P 500 has gone much higher…

IF MILLENNIALS CONTINUE TO STUMBLE, OUR ECONOMY WILL FAIL

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Millennial generation has suffered the consequences of an increasingly unequal global economy

BY CHARLES M. SENNOTT, GLOBALPOST

After a year-long reporting effort by The GroundTruth Project, a clearer picture is emerging of a millennial generation facing an uncertain global economy. Our team of 21 GroundTruth reporting fellows journeyed to 11 countries to tell the story of their own generation. It’s a complex picture which combines devastating realities for many young people who economists believe will be the first generation to be worse off than their parents.

But it is also a demographic group, typically defined as being born between 1980 and 2004, that holds out great promise for innovation and an entrepreneurial spirit that seems woven into their identity as digital natives. And this generation is actively, some might say desperately, being courted by President Obama as the swing vote in American electoral politics.

This year, it seems the world has begun to realize that a large piece of the millennial generation has suffered the consequences of an increasingly unequal global economy that has fostered despair and in many places, from Brazil’s street protests to the uprisings of the Arab Spring, violent expressions of dissatisfaction.

In Brazil, they mobilized to boycott the World Cup, accusing the government of squandering their future to host wealthy tourists rather than create opportunities for the country’s residents.

Economy adds 248,000 jobs, Unemployment Drops to 5.9 percentCNBC

In Spain, they are known by the Spanish-language shorthand “NiNis” because they’re neither working nor in school in a country with a youth unemployment rate above 50 percent.

In the Philippines, which has one of the youngest populations in the world, a small cohort are fighting over jobs at call centers in a booming ‘outsourcing’ sector while a much larger number slipping deeper into poverty.

In Nigeria, young people represented a “kidnapped generation” long before Boko Haram abducted 270 schoolgirls in April as a seemingly indifferent government was shamed on the world stage by the #BringBackOurGirls campaign.

In Egypt, the young people who inspired what became known as a “Facebook Revolution” that toppled a dictator are redirecting their energies to building technology startups out in the desert, defying a sinking economy in an increasingly authoritarian political climate.

In America, young people living in the country’s former industrial heartland are finding jobs are scarce while an innovation economy is creating a thriving culture of digital startups on the coasts.

If there is one truth that cuts across the different cultures and histories of the countries where our young reporters went to find stories, it is that the problem is global and rising in its urgency.

GroundTruth Managing Editor Kevin Grant, who has headed up these reporting teams in the field, said, “Our reporting revealed that youth unemployment has remarkably similar effects on societies around the world. When the future looks so bleak, it’s very difficult for young people to feel like they are part of something that matters. The mundane tasks of seeking a job can feel like a waste of energy when there is so little payoff. That has led many millennials to organize, to lash out and in some cases, to give up altogether.”

But Grant hastened to add that while there is frustration there are also streaks of hope and innovation in a generation that, as President Obama put it in a recent policy speech on millennials, has “an entrepreneurial spirit in its DNA.”

Read more: GlobalPost Groundtruth

Research shows the youth unemployment crisis is not limited to any particular country or region. It is no kinder to developed nations than to developing ones. Catastrophic levels of youth unemployment have emerged since the global economic downturn began in 2008 as a sort of plague on a “lost generation,” with powerful implications for the planet.

And what is increasingly clear is that we are all in this together. If this generation continues to stumble, the economy will fall.

A research report by the Young Invincibles, a post-recession youth advocacy group, found that persistently high unemployment among young people accounts for up to $25 billion a year in uncollected tax revenue and additional strains on existing funding for social services.

Rory O’Sullivan, the director of the advocacy group and co-author of the report titled “In This Together,” explained, “When you have an entire generation of people that are out of work, it’s going to create tremendous costs for taxpayers both now and in the future.”

The report also highlights the fact that federal youth jobs programs have been cut by $1 billion a year since 2002, and it calls for the Labor Department to expand apprenticeship programs and national service programs such as AmeriCorps, which had 500,000 applications last year for just 80,000 positions.

The World Economic Forum, which focused on the problem at its gathering in Davos in January, has emphasized the need for an entrepreneurial, “collective approach” to the problem to better match open positions with potential employees with required skills, providing training and mentorship programs to those who might be otherwise unemployable.

And the European Union has committed to an initiative that “seeks to ensure that member states offer all young people up to age 25 a quality job, continued education, an apprenticeship or a traineeship within four months of leaving formal education or becoming unemployed.”

As London-based economist Umair Haque, a frequent contributor to the Harvard Business Review, wrote in January, “So let’s call it what it is. Not just unfair — but unconscionable. The world’s so- called laders have more or less abandoned this generation.”

As a culmination of our year-long reporting effort, The GroundTruth Project and International House are co-hosting a conference titled “Generation Jobless” that is a gathering of thought leaders, politicians, economists, advocates and talented young people to work together to find solutions to the problem. We hope our reporting around the world on this issue will provide a framework for understanding the complexity and the layering of the economic realities for young people today.

As our own Kevin Grant put it, “We coined the concept of ‘Generation TBD’ to describe a large and often neglected demographic whose future is ‘to be determined.’ The uncertainty in that can be awful, the lack of trust in traditional institutions as some of the old paths to success disappear. But there is also freedom in not knowing what the future will look like, in forging new paths, and in taking it upon yourself to make the future you’ve been dreaming of. Our reporters say that seeing that process firsthand has been the most inspiring part of this project. I certainly feel the same way.”