The biggest news this week was Fed Chairman Ben Bernanke’s indication that the Fed was open to taper QE-4EVER by the end of 2013. This means that the $85 billion bond purchases per month would still continue for at least 6 more months. This would add a whopping $510 billion to the Fed’s balance sheet making it just shy of the $4 trillion mark. Nevertheless, the announcement roiled markets causing volatility in the equities, bonds and commodities market. There’s also increased chatter of the US economy gaining momentum in recovery which may require the Fed to taper its QE program.
Before we get carried away by the US recovery talk, let’s have a checkpoint of the state of the US economy from the following charts and decide how much of it is smoke. Essentially charts tracking debt levels continue on a steep path upwards. Money velocity continues to dip (despite so many rounds of QE). Given that the Keynesian-leaning Fed sees deflation an enemy, wouldn’t taking the QE punchbowl away now cause more deflation and make it harder for them to hit their 2pc inflation target?
Source: Fed Reserve Bank of St Louis