MATTHEW BOESLER SEP. 25, 2013
Last Wednesday, the Federal Reserve shocked markets with a surprise decision to refrain from beginning to taper back the pace of its bond-buying program known as quantitative easing.
In the press conference following the decision, Fed chairman Ben Bernanke cited the recent rise in long-term interest rates — spurred by Bernanke’s previous press conference in July, during which he seemed to endorse it — as a reason for the delay. Rates had risen too far, too fast, and they were presenting a threat to sustainable economic growth.
Nomura chief economist Richard Koo calls this a “QE ‘trap’ of [the Fed’s] own making,” writing in a note to clients that the Fed’s decision last week is a clear sign that a “vicious cycle of rising rates and economic weakness has already emerged.”
The yield on the 10-year U.S. Treasury note rose as high as 3.0% in the weeks before the Fed announced its decision not to taper.
“Instead of falling back to 2.0% or lower following the Fed’s decision to delay tapering, the 10-year Treasury yield has settled at around 2.5%, which means the next rise in rates could easily take the 10-year yield into 3.0%-plus territory,” says Koo. “I worry that this kind of intermittent increase in rates threatens the recoveries in interest- rate-sensitive sectors such as housing and automobiles. That could lead to renewed hesitance at the Fed and prompt it to temporarily shelve or postpone tapering.”
That’s how the vicious cycle starts.
Read the full article at: http://www.businessinsider.com/richard-koo-says-fed-now-facing-true-cost-of-quantitative-easing-2013-9#ixzz2g2mUiePG
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