Tags: Fed | taper | QE | Congress

Will the Fed Use Washington as an Excuse Not to Taper?

Wednesday, 11 Sep 2013 01:50 PM

By David Nelson

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David Nelson is chief strategist of Belpointe Asset Management and a Moneynews contributor.

There comes a point in every party when your next cocktail or beer doesn't give you that warm fuzzy feeling. If you're smart you get the message, grab your coat and head home.

For the last half decade, the Federal Reserve has kept the punchbowl filled and the party raged on. Asset prices are up dramatically and the economy certainly isn't in the precarious state it was in 2009.

There are strong arguments on both sides of the debate as to whether or not Fed actions have helped stabilize the economy. I for one believe Fed moves in 2008 were imperative. The domino effect of bank after bank collapsing would have brought the financial system to its knees. You can even make a case that subsequent programs helped stabilize markets and fuel a recovery in housing.

However, it is becoming clear Fed efforts to manage the economy with monetary policy are hitting a wall and these programs offer diminishing returns.

The good news is the Fed gets it. Several months ago, Fed Chairman Ben Bernanke made it clear the Fed is contemplating the winding down of bond purchases and an eventual exit of quantitative easing (QE) policies. I think they see what many of us see. The continued use of this tool is adding little to the economy and there are secular and cyclical issues holding back employment that the Fed can't control.

Addressing fiscal policy is the key to a sustained U.S. recovery. I doubt this is news to anyone other than Congress and the president. Both sides of the aisle are dug in, seemingly willing to fight to the death to defend their positions.

Most economists believe the Fed will at least make a token reduction in the $85 billion per month in purchases. Whether they go to $65 billion, $70 billion or even $80 billion, they have to start.

Lurking in the background is the Perfect Storm developing over Washington. The continuing resolution, the budget debate and the debt limit are all issues Congress will have to address. There is precious little time to deal with events that could cripple the U.S. economy.

Will the Fed use the upcoming battle in Washington as an excuse to postpone the taper?

Kansas City Fed President Esther George says they should taper to $70 billion. However, there are others like Chicago Fed President Charles Evans who says the taper isn't a done deal.

The Fed needs to stick to its guns and start their exit from QE. They should make it known they are no longer in a position to bail out congress.

It's time for the Fed to flash the lights on and off and signal last call.

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