Debunking the “Fed-xit”

Ben Bernanke trying to find the closest “Fed-xit” in the building. Alex Wong/Getty Images

Recent headlines have highlighted concern over what “the end of quantitative easing (QE)” may bring. But much of the recent reporting seems to be making the same few critical errors.

Fed-xit Myth 1: The Fed’s QE Exit Date is Set...

Or is it? Though some may speculate about when exactly QE’s end begins, no hard date has actually been set. According to Fed head Ben Bernanke, if the economy continues improving, QE could start winding down towards the end of 2013 and wrap up in 2014—a rather vague timeline, particularly since the degree of economic improvement will be judged, subjectively, by the FOMC.

And even if the FOMC had announced a specific date or timeline, that doesn’t mean they can’t change it. The Fed, like any other government agency, isn’t above pushing deadlines back.

Fed-xit Myth 2: The Fed’s Exit Will Be Dramatic and Huge

We have qualms with using the word “exit” at all. Currently, the Fed has said it plans to “taper,” i.e., slowly scale back the current pace of long-term asset purchases. This means, whenever the taper starts, the Fed balance sheet won’t shrink. The reverse: It will keep growing for some time, just at a slower pace.

Fed-xit Myth 3:Ending QE Means Skyrocketing Interest Rates

Rates needn’t necessarily rise quickly when said taper commences. In fact, recent bond yield volatility may be markets pricing in that future event. Further, per Myth 2, the Fed is going to taper—not cease and not start selling bonds. At least that’s currently the plan.

And, rates rising some will help steepen the yield curve, which leads to...

Fed-xit Myth 4:Ending QE Is Bad—It’s The Only Thing Driving The Bull Market

This myth is wrong for many reasons. Ending QE would actually be a good thing in our view.

The Fed itself regards a steeper yield curve economically beneficial, yet via QE bond purchases, it has been flattening the yield curve. A steeper yield curve gives banks more incentive to lend. And increasing bank lending would be an economic positive, particularly since lending growth has been sluggish throughout the current expansion. More lending means more fodder for business investment and growth.

The Fed’s QE-infinity policy has been contractionary and deflationary. That the US has eked out growth is a remarkable testament to the resiliency of the US economy. Ceasing or slowing QE should be a positive—more so because most folks see it exactly backward.