PLP Advisors, LLC

Dennis Tubbergen Asks: Is Fed Chairman Bernanke Losing Control

 

Grand Rapids, MI -- (ReleaseWire) -- 07/11/2013 -- For those of us who are too busy to stay on top of events in the world's economy, financial advisor Dennis Tubbergen can often lend a helping hand.

Tubbergen is a financial advisor, author, radio show host and CEO of PLP Advisors, LLC. Tubbergen does his best to give brief updates when it comes to some of the latest significant events in U.S. and world economics and politics and how these events may impact the average American.

Whether people enjoy his monthly newsletter at www.moving-markets.com or his blog at www.dennistubbergen.com, Tubbergen can be counted on to share his viewpoints and opinions. On July 9, 2013 his blog was titled Bernanke Losing Control.

"Forbes recently ran an interesting piece describing the reaction of the markets when Federal Reserve Chairman Ben Bernanke, hinted that the central bank may take its foot off the gas when it comes to easing," began Tubbergen.

Below he quotes from the July 1, 2013 article.

Fed Chairman Ben Bernanke is by far the most important market player out there, a fact that was made painfully obvious since May 22, when speaking before Congress he suggested QE tapering could begin soon. The problem is that Bernanke lost control, spooking a market that refuses to see a draw-down of the Fed’s asset purchase program as separate from its ultra-accommodative monetary policy. Indeed, investors now expect the Fed to hike rates in late 2014, from May 2015 before Bernanke’s post-FOMC press conference, with tapering starting as early as September or December this year.

The Chairman, therefore, has a challenge before him: regaining control of market expectations in order to separate the end of QE from an increase in interest rates to convince market participants the Fed is still holding their hand.

“Sometimes providing more clarity can create more volatility than it removes,” explained Barclays’ Joseph Abate. And his statement couldn’t be closer to the truth. After Bernanke took the stage to address reporters, explaining to them his timetable for the end of QE, repeating that everything is data dependent, and suggesting interest rates will probably remain lower for several quarters after hitting the unemployment rate threshold (6.5%), global markets completely overreacted and the yield on 10-year Treasuries spiked.

Indeed, data compiled by Goldman Sachs indicates the market now anticipates the first rate hikes in December 2014, a full six months ahead of their pre-FOMC expectations. And that is despite the Fed’s own projections, which put the unemployment rate between 6.5% and 6.8% next year, only breaking the threshold in 2015 when joblessness falls to 5.8% to 6.2%.

Academic research cited by Goldman suggests that if the Fed begins to taper three months ahead of their December 2013 forecast, it translate to $250 billion less in its stock of assets by mid-to-late 2014. In terms of bond yields, that should push 10-year yields up by about 10 basis points, Goldman’s Jan Hatzius says (adding estimates put the effect of $1 trillion on the Fed’s balance sheet at 43 basis points). This would push real GDP down by 0.1 to 0.2 percentage points.

"Here’s the rub for Bernanke," explains Tubbergen. "He can’t separate the end of QE from an increase in interest rates. If the Fed quits printing, interest rates will have to rise. While that’s my opinion, it’s backed by some simple math."

Tubbergen goes on to say an article published by Bloomberg December 3, 2012 reported that the Federal Reserve was buying 90% of all new U.S. government debt. If the Fed scales back its purchases of U.S. government debt, some other entity will have to step in and buy the debt unless the U.S. government were to suddenly balance its budget which is a highly doubtful outcome. Presently, the U.S. government almost has a captive audience when it comes to purchasing its debt – the Federal Reserve. If the Fed pulls back, other investors will have to step up and fill the gap.

"Given that US debt levels are rising, although they are rising more slowly than previously, investors will probably require a higher interest rate to loan the U.S. money than in years past," concludes Tubbergen. "That will mean that interest rates will have to rise."

To read Tubbergen's blog in its entirety go to http://www.dennistubbergen.com and select his July 9, 2013 entry.

Tubbergen’s syndicated radio show can be heard on metro Michigan stations WTKG 1230 AM and WOOD Newsradio1300 AM and 106.9 FM.

About Dennis Tubbergen
Dennis Tubbergen has been in the financial industry for over 25 years and has his corporate offices in Grand Rapids, Michigan. Tubbergen is CEO of PLP Advisors, LLC and has an online blog that can be read at www.dennistubbergen.com. To view Tubbergen’s latest Moving Markets? newsletter, go to www.moving-markets.com.

The opinions expressed herein are those of the writer and not necessarily those of USA Wealth Management, LLC. This update may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Therefore, no forecast should be construed as a guarantee. Prior to making any investment decision, individuals should consult a professional to determine the risks, costs, benefits and fees associated with a particular investment. Information obtained from third party resources is believed to be reliable but the accuracy cannot be guaranteed.