Comments from Philly Fed President Charles Plosser would
likely keep the spotlight on the Fed's QE program in today's
trading session. Mr. Plosser is part of the hawks on the FOMC
that have been arguing for scaling back the pace of bond
purchases before stopping the program altogether. The future of
the QE program has been in the headlines since the weekend
article in the Wall Street Journal that discussed the Fed's plans
to map an exit strategy. Mr. Plosser favors the reductions in
bond purchases to take effect now, ahead of the program's end at
a future date.
Is this a trial balloon by the Fed to prepare the market for
the eventual changes to the program or the wishes of FOMC hawks
who have long been arguing along these lines?
Hard to tell at this stage. But the reality is that the
Bernanke Fed justifiably takes pride in its transparency and
unambiguous communications. And they would take their time in
preparing investors for the long-anticipated changes. The reality
is that as extraordinary as the QE program has been in its size,
scope and market impact, the unwinding process will be even more
significant. One could envision the Fed stopping the bond
purchases at some future date, but letting its balance sheet
shrink back at a slow and methodical process over an extended
period of time through natural maturities.
This is an extremely useful debate given the centrality of the
program to the market's gains. And the debate may be timely as
well. After all, the economy seems to chugging along just fine,
with momentum in housing appearing to offset some of the
headwinds from the payroll tax increases and the budget
sequester. At least that's what some of the more recent data,
like Monday's Retail Sales numbers, seem to suggest. We have
plenty of important economic data on tap later this week that
will shed more light on the economy.
The Fed's goal will be to change the program without
materially disrupting the market. Market disruptions mean sudden
changes to interest rates, foreign exchange rates, and the values
of other asset classes. But it's hard to envision the stock
market hanging on its recent gains in the absence of an active QE
program. I have long been of the view that the stock market's
record level is not reflective of fundamental realities. As such,
most of the recent gains will not be sustainable in a world after
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