Tags: Schiff | economy | Fed | tapering

Peter Schiff: Weak Economy Will Force Fed to Reverse Tapering

By    |   Monday, 23 December 2013 07:30 AM

The economy won't be able to stand on its own two feet without quantitative easing (QE), leading the Federal Reserve to reverse its tapering, says Peter Schiff, CEO of Euro Pacific Capital.

The Fed announced Wednesday that it is cutting its monthly bond purchases by $10 billion to total $75 billion.

"The $10 billion reduction has convinced many that the QE program will soon become a thing of the past," Schiff writes in a guest column for Yahoo.

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"At his press conference [Fed Chairman Ben] Bernanke affirmed that he expects QE to be fully wound down by the end of 2014. Look for those forecasts to change rapidly."

As the Fed withdraws QE, the economy will stumble, and the stock and real estate markets will probably plummet, Schiff says.

"I suspect that when the economic data begins to disappoint, the Fed will quickly reverse course and increase the size of its monthly purchases," he argues.

The Fed avoided committing itself to future tapering in its statement Wednesday. "It merely said that further changes in the amount of purchases will be dependent on the data," Schiff notes. "This means that QE could go in either direction."

The Fed's more dovish language on interest rates in the statement was actually more significant that the tapering, he adds.

According to the statement from the Federal Open Market Committee (FOMC) after the meeting, Fed policymakers believe it "likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6 1/2 percent."

The fed funds target now stands at a record low of zero to 0.25 percent.

"[The] statement goes significantly farther than any prior communications in assuring that interest-rate policy, its [the Fed's] main monetary tool, will remain far more accommodative, for far longer, than anyone previously predicted," Schiff explains.

"On this score the Fed is not simply moving the goalposts, they are running away with them. With such amorphous language in place the FOMC appears to be hoping that it will never have to face a day of reckoning in which they will be forced to actually raise rates."

The tapering is a minor move in terms of diminishing the Fed's asset buildup, Schiff contends. "I believe that the Fed's balance sheet will continue to swell at a pace that would have shocked Wall Street even a few years ago."

Many other economists expressed more enthusiasm about the Fed's move. "The Fed is right to be more confident about the short-term outlook for the economy," Pimco CEO Mohamed El-Erian writes in a commentary for CNBC.

But the Fed is also right to remain worried by sluggish economic growth and high unemployment, El-Erian says. "This mixed outlook calls for a very delicate policy balance, with the Fed having to walk quite a tight rope."

This explains why in addition to announcing the tapering, the Fed offered even more dovish language on the fed funds rate, El-Erian notes.

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Economy
The economy won't be able to stand on its own two feet without quantitative easing (QE), leading the Federal Reserve to reverse its tapering, says Peter Schiff, CEO of Euro Pacific Capital.
Schiff,economy,Fed,tapering
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2013-30-23
Monday, 23 December 2013 07:30 AM
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