A strengthening recovery is likely to lead the Federal Reserve to abandon its vaunted second round of quantitative easing earlier than most expect, says David Frazier, editor of The ETF Strategist newsletter, published by Newsmax Media.
In an interview with Moneynews.com, Frazier explained that he believes that the Fed will do exactly what it promised in its initial pledge to spend hundreds of billions buying Treasurys through the middle of 2011 — which was to base continued purchases on developments in the economy.
The Fed began the second round of debt purchases in November after telegraphing the move in August. It said then that the buying would last until June 2011 if conditions warranted and would consist of up to $600 billion in new purchases and $300 billion in extra purchases as previous debt rolled over.
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“The Fed never said — never said — that it is definitively going to purchase $600 billion, $900 billion, whatever number you want to use, they never said that," he said. "What the Fed did say is that they would continue to monitor economic data, and that they might purchase up to that amount of Treasury securities based on the economic situation,” he said.
Frazier says that data just a month after the purchases began suggest that the U.S. economy will grow at a faster rate in 2011 compared to 2010, and that the employment rate subsequently will improve.
By March, Frazier estimates, the Fed is likely to review the latest data and, soon after, conclude that it doesn't need to keep buying Treasurys.
Once the central bank sees the data, “the Fed’s going to stop purchasing,” Frazier says.
Don’t expect the jobless rate to drop immediately, though, he says.
Historically, by the time the job market improves enough for most people to notice the recovery is already well under way, Frazier says.
“We’ve never had, ever, a ‘jobs-driven’ recovery . . . Going back to at least 1920, economic data shows that economies begin to recover three to six months before you see meaningful improvements in the employment market,” Frazier said.
Instead, as the recovery takes hold, employers likely will increase hours on underemployed current staff, add overtime as needed, and look for productivity gains. Expect the jobs number to improve only after it is evident that hiring is absolutely necessary, Frazier says.
Frazier doesn't expect the housing market to improve during the coming months, yet he says investors have already factored in a weak housing market.
“I think the housing market will have a minimal effect on stocks,” Frazier says.
Meanwhile, corporate earnings in the aggregate should continue to rise in 2011.
Unemployment will remain relatively high, Frazier predicts. That means, however, that the currently employed will probably work harder and wages will remain flat.
Since labor is a large part of corporate expenses, stagnant wages should boost corporate profitability, he predicts.
Meanwhile, economies around the world will improve, he says, and the extension of the Bush-era tax cuts will support a recovery already on the way.
Many Americans have spent much of the last few years paying down household debt, now at the lowest level since March 1998, Frazier points out.
People who have a job will get a “raise” this year of $1,500 to $2,500 on the tax break, he says.
“Given that you’ve already paid down a lot of that debt, you’re probably going to go out and spend some of that money,” Frazier says.
“I’m quite sure Americans overall will go out and spend some of this money they are getting through the tax cut. That’s a big positive” for the economy, he says.
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