Payroll data indicates Fed will not taper purchases soon

BROOKINGS, Ore. - June 7, 2013 - PRLog -- The Federal Reserve has a dual mandate of support of the labor market with low inflation. Inflation is in check, but today’s release of non-farm payroll data for May, by the Bureau of Labor Statistics, shows a slow employment recovery. The economy added 175,000 jobs in May. The economy needs to gain 150,000 to 200,000 jobs a month to keep pace with population growth. Recent months have been far under this level, preventing the recovery from gaining strength. Unemployment rose to 7.6 percent from 7.5 percent.  Friday’s report shows the economy is still soft.

Minutes of the past FOMC meeting showed several members favor reducing bond purchases, if the economy demonstrates strong and sustained growth. Chairman Ben Bernanke told a congressional panel last month the Fed could consider slowing the pace of bond purchases over the next few meetings, if the job market shows “real and sustainable progress.”

Comments from some Fed officials raised expectations the Fed could start easing off its support for the economy soon, sending the stock market sharply lower in the last few weeks. Kansas City Fed president Esther George recently stated “because of improving economic conditions” she supported a slowing down of asset purchases.

However, Ben Bernanke, vice-chair Janet Yellen, and an inner circle of doves, control Fed policy. Bernanke has stated repeatedly the FOMC would continue its securities purchases until the outlook for the labor market has improved substantially, in a context of price stability. He has stated a premature tightening of monetary policy could lead interest rates to rise, and risk an ending to the recovery.

Chicago Fed President Charles Evans, one of the inner circle doves, said he did not see purchases stopping until job gains of at least 200,000 each month for several months. Goldman Sachs’ chief economist believes the Fed will continue asset purchases until the third quarter of 2014, and interest rates will remain at zero until early 2016.  

Anyone who has read Bernanke’s speeches knows he supports the Bernanke-Krugman-Svensson theory, which endorses interest rates at zero, devaluation of the dollar by quantitative easing, and the manipulation of opinion to create fear of inflation to stimulate the economy. Lars Svensson, Paul Krugman and Ben Bernanke, as fellow faculty colleagues at Princeton in the 1990s, shared the belief that currency devaluation is a method to increase exports at the expense of other countries. Bernanke accepts the Keynesian multiplier theory that a dollar of government deficit spending can produce more than a dollar of total economic output.

Nearly 50% of the total outstanding debt of the world’s top 10 debtor nations needs to be rolled over by the end of 2015. Global central banks will need to monetized debt in massive quantities over the next several years. Bond purchases by central banks will absorb government debt rollovers and cheapen currency to spur exports. Without quantitative easing holding interest rates down to all-time lows, the US government would face a debt crisis. Although the US situation is not a bad as Japan, interest payments still compose approximately 10% of the federal budget, and 19% of revenues. If interest rates climbed up to historical averages, interest payments would take more than 38% of tax revenues. Europe is in a recession, Japan is flirting with a recession, and the rest of Asia is slowing down. The Fed appears to be trapped in a zero interest rate bound, until a spike in oil prices forces their hand.

At some point in the future, the Fed will reach its goal of increased inflation, and funds will rotate out of bonds into equities. The discussion surrounding the tapering of bond purchases is a head fake manufactured for public consumption, to cool down the stock, and commodities markets. This would imply the Fed will continue to monetize the national debt, until the Brent vigilantes raise the price of crude oil high enough to force the Fed to deflate the stock and commodities bubble.

　

For more information on currency wars see:

Teapartyculturewar.com or

“Tea Party Culture War: a clash of worldviews”, by Dr. Stephen Johnston