Tapering, a New Word in the Economic Jargon Is the Fed Siginiling Higher Interest Rates Is There Fear of Inflation


Scottsdale, AZ -- (SBWIRE) -- 05/28/2013 -- The FED has been purchasing $85 billion of debt securities every month, Treasuries and mortgage-backed securities. They had said that this would continue until the rate of unemployment dropped, with a target of 6.5%. Although there has been some slight improvement in the employment situation the current unemployment rate of 7.5% is still a long way from the target. The economy has not been strong. First quarter GDP showed an increase of 2.5%. That was below the 3.5% expected by many economists. That was before the negative drag that will come from the “sequester” spending cuts. My expectation has been for a 2.5% GDP growth for the year. I think that my target will be difficult to achieve.

The FED, under the chairmanship of Bernanke has been very open. He has been very different from prior chairmen. He has tried to avoid surprises by having monetary polices well announced in advance. The question is why, in the face of an economy that is not close to robust, are we hearing talk of a tapering of the aggressive monetary policy that has been in place for some time now. There can be only one answer and that is the fear of inflation. Until now monetary policy has been focused on increasing liquidity in the economy. The objective was to try to stimulate economic activity. There has been some success in this direction, however monetary policy alone can not do the job. Fiscal policy is needed to help in creating demand. Increased federal spending has not been forthcoming as a pump primer. The result of the increase in liquidity is that money has not gone into job creation. Instead we have seen increases in securities values and in Real Estate values.

I am not suggesting that this is bad. What I am saying is that the FED may be looking down the road at some increase in inflation. When the FED buys Treasuries and mortgage-backed securities, backed by the government, its is simply printing money. In an expanding economy that can be handled without too much inflation. In a slow economy it can lead to increased inflation. How is inflation contained? By increasing interest rates. If the FED starts to taper their securities purchasing, interest rates will increase. When that happens capitalization rates go up and values go down, a double hit. In addition securities prices will top.

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