Market Tumbles on Fed Uncertainty

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The Bullion Bank Analyst: Why 65% of Economists are Wrong About the Fed’s Next Steps

Housing and stocks will be hit hard if the Fed doesn’t control expectations and rising rates. For this reason they will persist, even if the long run consequences are disastrous.

As of Thursday, August 15th, the Dow Jones Industrial Average (http://finance.yahoo.com/q?s=^dji) has sunk 2% over the last two days as speculation mounts that the Federal Reserve will begin to slow down bond purchases. Meanwhile, the price of gold (http://goldprice.org/) has risen to a seven week high, even as slowing QE is generally seen as bearish for the precious metals.

A recent Bloomberg Article (http://www.voxxi.com/economists-federal-reserve-reducing-qe/) displayed the results of a survey that indicated that 65% of economists believed the Fed would begin to slow the purchase of bond and mortgage securities as soon as next month, this despite the fact that the Fed has not met its employment or inflation goals with the current level of purchases.

The BullionReport.com (http://bullionreport.com/gold-manipulation-big-deal/) brought up an interesting viewpoint in a recent article, deducing that the price of bonds and thus the interest rate affect the housing and stock markets directly. The author then goes on to say, “If bonds are priced artificially high because of the Fed’s increased buying, it means when they stop, however unlikely, interest rates are likely to skyrocket as bond prices fall.”

It is the viewpoint of this analyst that it is highly unlikely, if not nearly impossible for the Fed to reduce the pace of bond purchases as the domino effect that it will create will be disastrous for an already shaky economy. If the Fed reduces Bond purchases, they will essentially be telling bond buyers and holders that the price will no longer be artificially propped up. This could lead to a flight from bonds and continued rising interest rates, even higher than where it currently sits at its two year high. Housing and stocks will be hit hard if the Fed doesn’t control expectations and rising rates. For this reason, they will persist, even if the long run consequences are disastrous.

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Nick Spohn
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