Economists Suggest Fed Should Taper QE

Economist Grannis to the Fed: 'Where's the Beef?'

Thursday, 07 Nov 2013 07:50 AM

By John Morgan

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The U.S. economy no longer needs training wheels, according to Scott Grannis, former chief economist at Western Asset Management.

"There are no signs of distress, no signs of impending recession and only a few areas that are weak," Grannis wrote on his "Calafia Beach Pundit" blog.

So it's clear to him what the U.S. central bank's next step should be — to taper its massive $85 billion monthly asset purchases.



His analysis of recent Institute for Supply Management statistics shows the U.S. economy, from a manufacturing, services sector and services employment standpoint, is approximately in line with other business cycle expansions since 1997.

Moreover, he noted, the eurozone has likewise emerged from recession, thus the previous international economic drag that came from Europe has eased.

"So where's the beef? Where are awful conditions that warrant extreme monetary policy measures?"

Grannis said global demand for safe assets — "and by extension, the world's risk aversion" — is slowing, a positive sign.

"Demand for gold and short-maturity TIPS [Treasury Inflation-Protected Securities] has fallen significantly this year, and equity prices have strengthened. There's a lot less need for continued QE [quantitative easing]. The Fed's next move should be to taper its QE purchases, and it should come sooner rather than later," Grannis concluded.

John Brynjolfsson, chief investment officer for hedge fund Armored Wolf, agreed it would be smart for the Fed to exit its massive stimulus sooner rather than later.

In a column for Real Clear Markets, Brynjolfsson said there is growing interest rate risk from the fact the Fed has amassed what could amount to $4 trillion in debt from its QE effort before it ends.

He wrote that the Fed is "not akin to an S&L [savings and loan] or hedge fund simply because all of the Fed's liabilities (currency and reserves) are implicitly backed by the U.S. Treasury and Congress. Put more plainly, taxpayers own the Fed's losses."

Brynjolfsson said that with even a "modest" 2 percent rise in interest rates, a loss of $800 billion on the Fed's debt could be passed on to taxpayers.

Simon Baker, the CEO of Baker Ave. Asset Management, told Yahoo the Fed's immense QE programs amount to "a massive, $3.7 trillion redistribution of wealth" that has only benefited banks, financial firms, and the wealthiest 5 percent of Americans.

"They're the ones benefiting, not Main Street," Baker said.



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