Job numbers not enough for Fed taper of asset purchases

BROOKINGS, Ore. - Dec. 6, 2013 - PRLog -- Earlier this week officials said GDP increased in third quarter to 2.8% . All of a sudden the American economy is looking very resilient. Joe La Vorgna, Chief US Economist at Deutsche Bank, believes non-farm payroll increases for the month of November may be strong enough for the Fed to begin tapering in December. However, the majority of economists surveyed in a Bloomberg report believe the Fed will taper their $85 billion a month purchase of bonds in March, 2014.

The Fed’s latest six week survey of regional economic conditions reported in the Beige Book shows modest growth. Although consumer spending grew modestly to moderately, retailers are uncertain for holiday season. Many Fed watchers believe it is unlikely the Fed with taper the week before Christmas, and threaten the holiday market.

Dennis Lockhart, Atlanta Fed Bank President, recently said the time is nearing for the central bank to pull back on its easy-money policies. However, none of the strong majority who control the FMOC vote, has yet said it is time to slow the Quantitative Easing program now.

The new Fed Chair, Janet Yellen, is likely to emphasize consensus less and her own views more. She is a strong advocate of a rules-based approach. She accepts the theory of the Phillips Curve, that inflation can lower unemployment. However, she is more pro-active than Stanford Professor John Taylor, who believes moderate inflation can help employment.

Yellen will look for a broad-based improvement in labor indicators before recommending slowing of quantitative easing. Yellen places a heavier weight on employment than inflation. While the Taylor rules gives equal weight to deviation of inflation and unemployment, Yellen gives double weight to the unemployment gap deviation.

Yellen’s “optimal control” methodology would allow inflation to overshoot the Fed 2% target as long as that would help bring unemployment down to 6.5%. She also looks at a broader measure of unemployed such as U-6 which shows the unemployment rate was 13.6% in September, well above the headline rate of 7.2%.

Critics such as Marc Farber, Peter Schiff and James Rickards believe historical data rejects the Phillip Curve and believe it is possible to have inflation and high unemployment, or stagflation which occurred in the 1970s. Financial advisor Mar Faber believes Janet Yellen will make Ben Bernanke look like a monetary Hawk. He believes Yellen will not taper, but will be forced to add to Fed purchases of assets. Peter Schiff believes the Fed may promise to taper, but he believes they know the U.S. will go back into a recession if they taper. He believes the Fed is trapped in QE and has no exit plan.

China dropped a bombshell which is almost entirely ignored by the mainstream media in the United States. The central bank of China has decided it is “no longer in China’s favor to accumulate foreign-exchange reserves”. In the past China has been pegging its currency the Yuan below the dollar to increase exports. This has resulted in a massive flood of super cheap products from across the Pacific that U.S. consumers have been gobbling up.

When Treasury Secretary of Treasure, Timothy Geithner could not get the Chinese to increase the price of their currency, Ben Bernanke responded with quantitative easing to keep interest rates at zero and devalue the dollar to increase exports. Easy money and dollar devaluations are part of broader currency war. The Chinese, Arabs and other emerging markets in Asia and Latin America have complained about the Fed’s easy money policy and the devaluation of the dollar.

China has apparently decided to allow its currency to fluctuate more. Without intervention it does not need to hold large reserves of the dollar. It has apparently stopped buying U.S. Treasuries and increased it purchases of gold and oil. It has been reported that China has been buying 120% of the world’s production of gold. A Chinese company is acquiring the largest commercial gold vault in the world in the Chase Manhattan Plaza in New York.

The World Gold Council estimates China will import over 1000 tons of gold this year, overtaking India as the biggest buyer in the world. A ton of gold is worth approximately $40 million. China is reportedly importing approximately 40 billion dollars in gold a year. Zerohedge estimates China’s unofficial gold holding will reach 3,554 tons by the end of 2013 and reach 4,500 tons by the end of 2014. This will make China the second largest holder of gold in the world. Germany will drop to third place with 3,390 tons.

“Remove far from me vanity and lies; give me neither poverty nor riches; feed me with food convenient for me, lest I be full, and deny thee, and say, Who is the Lord? Or least I be poor, and steal, and take the name of my God in vain.” Proverbs 30:8 & 9.

For more information on the Federal Reserve tapering of bond purchases and the culture war see:

　

Teapartyculturewar.com