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Investments

Attacking the Fed on no-taper is just plain wrong

Monetary policy prevents another recession, by design

September 26, 2013
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As dust settles around last week's no-taper announcement from the Federal Reserve, terms such as "shocked" and "baffling" surround coverage of the decision.

Many reporters and traders alike argue that neither would be a good way to describe market reaction, I refrain from naming who exactly, but the terms make for good reading.

In fact, many signs showed the opposite: The economic numbers do not support QE tapering.

Outgoing Chair Ben Bernanke long argued that monetary policy is designed currently to avoid another slide back into recession.

In a great interview on the Credit Suisse (CS) website, Michael Strobaek, Global Chief Investment Officer in the firm's Private Banking and Wealth Management division, laid out his level of surprise at the no-taper announcement.

Notice the wording there: surprise, not shock or bafflement.

It appears that press reports at large seek to criticize the Fed, thought it's actually doing everything right.

Zero Interest Rate Policy is an implicit nod to just how fragile an economy is. If ZIRP is in action, yet your currency is stable, then it is working. After the Fed announcement the dollar dropped visibly, but will not likely stay weak. Stable monetary flow gives hope to steady paychecks. More jobs equal better macroeconomic conditions and, at some point, ZIRP can be lifted.

The economics don't currently support lifting ZIRP, or tapering MBS and Treasury purchases, which artificially compress rates.

But this is not to say there isn't valid criticism. On one hand, Strobaek says blaming the activity of the Federal Reserve is wrong. On the other hand, he said they are underweight equities primarily because "the uncertainty that the Fed has created is exactly what the markets did not expect."

The Fed said all along it would exit only when conditions supported it. The economic recovery is clearly at risk of derailing; the government is rushing to avoid shutting down and Bernanke is outgoing.

Both of these conditions will have moved toward resolution in time for the next Fed meeting. Still, it might not be enough. So while there may be no change, and consensus appears 50/50, let's hope we can get by without attacking the Fed for its decision.

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