The 3rd quarter ended with the global markets – both equities and fixed income – experiencing gains. The news has been dominated lately by the government shutdown and debt ceiling headlines. Even though the political jabs, finger pointing and the like make for good theater, the chart below, at least, tells us what will happen with the debt ceiling debate – as I’m writing this commentary, Congress has still not passed a bill that reopens the government and/or raises the debt ceiling.
As you can see, the black line has never gone backward. Further, in the current environment of a weak economy, it is very unlikely that the debt ceiling will be left at its current level. The wrangling over the budget is well beyond the scope of this email, but it is a certainty that the budget will be well beyond the revenue of the US, further deepening the national debt.
This leads to the next topic, which has conveniently taken a back seat to the budget drama, and that is the Federal Reserve’s (Fed) taper dilemma. At last update, the Fed decided not to taper its bond purchases from the current $85 billion per month. Since the Fed’s non-taper decision, we note a very important admittance by James Bullard, chief of the St. Louis Federal Reserve Bank. In a speech on September 20, 2013 Mr. Bullard stated:
“Financial market reaction to the June and September FOMC meetings provides sharp evidence that changes in the expected pace of asset purchases have conventional monetary policy effects.”
In other words, the academics at the Fed are beginning to realize that the flow of bond purchases is just as (or more) important than the stock of bond purchases. Since QE began, the Fed has been operating under the assumption that the ‘pace’ (or flow) at which they are buying bonds (to keep rates down) was not as big an issue as the total of the bonds they intended to buy (stock of bonds). Mr. Bullard, in the statement above, just admitted that if the ‘pace’ of bond purchasing changes, there will be a change in interest rates. This puts the idea that the Fed can taper without a negative consequence to the markets in serious question. As the old saying goes, it is a lot easier getting into trouble than it is getting out of trouble. So, while we are currently haggling over the debt and budget, be sure that the taper issue is nowhere near over. I will be watching the taper issue very closely as it will continue to be a large driver of markets.
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John P. Chladek, MBA, CFP® is the President of Chladek Wealth Management, LLC, a fee-only financial planning and investment management firm specializing in helping families and couples who are not yet retired realize their financial goals. For more information, visit https://www.chladekwealth.com.
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