Profit Confidential (www.ProfitConfidential.com), an e-letter published by Lombardi Publishing Corporation, a 27-year-old consumer publisher that has served over one million customers in 141 countries, is releasing a warning to readers that the Federal Reserve’s modest $10.0-billion-per-month quantitative easing tapering efforts are already having a significant impact on interest rates in the near and long term.
On Wednesday December 18, the Federal Reserve surprised Wall Street when it announced it would start to cut back on its $85.0-billion-per-month quantitative easing strategy by $10.0 billion per month. To ease fears of inflation, the Federal Reserve said it would keep the federal funds rate at 0.25% until unemployment gets to at least 6.5%, which may, according to the Federal Reserve’s own projections, not take place until mid-2015. (Source: “Press Release,” Board of Governors of the Federal Reserve web site, December 18, 2013; www.federalreserve.gov/newsevents/press/monetary/20131218a.htm.)
“While Wall Street was celebrating the news that the Federal Fund rate would hover near zero, on December 19, without much fanfare or news, the bellwether 10-year U.S. Treasury hit a yield of 2.9%—double what it yielded in June 2012,” says lead contributor and financial expert Michael Lombardi. “The Federal Reserve only slightly pulled back on its money printing program, and interest rates are already spiking.” (Source: Eisen, B., “Treasurys [sic] Cut Losses After Lackluster Data,” FOX Business web site, December 23, 2013; http://www.foxbusiness.com/markets/2013/12/23/treasurys-cut-losses-after-lackluster-data/.)
During the same week that the Federal Reserve announced it would begin tapering its quantitative easing efforts, Lombardi observes, the standard 30-year mortgage rate hit 4.52%, up from 3.35% in November of 2012. Over the course of the last year, mortgage rates have increased by about a third. (Source: “30-Year Fixed-Rate Mortgages Since 1971,” Freddie Mac web site; http://www.freddiemac.com/pmms/pmms30.htm, last accessed December 18, 2013.)
“Beginning in January, the Federal Reserve will purchase $35.0 billion of agency mortgage-backed securities and $40.0 billion per month of longer-term Treasury securities per month. In other words, the Federal Reserve will continue to print $75.0 billion a month as opposed to $85.0 billion,” Lombardi notes. “If it continues to print $75.0 billion a month through 2014, its balance sheet will grow by another $900 billion. By the end of 2014, the Federal Reserve’s balance sheet will have bloated to almost $5.0 trillion.”
All this printing of new money that the Federal Reserve has undertaken since the credit crisis of 2008 hit will come back to haunt us in the form of higher interest rates and inflation, he explains. The higher interest rates have already started. While the “official” government figures don’t show it, inflation is a problem too; as interest rates and inflation rise, the economy will soften.
“The Federal Reserve printed off $4.0 trillion in an effort to jump-start the economy. Unfortunately, that hasn’t happened on a meaningful level; unemployment remains stubbornly high at seven percent, while the underemployment rate is at 13%. And now interest rates and inflation are on the move. All of the economic ingredients are in place for a soft U.S. economy in 2014,” Lombardi concludes.
Founded in 1986, Lombardi Publishing Corporation, which has served over one million customers in 141 countries, is one of the largest consumer information publishers in the world. For more information on Lombardi Publishing Corporation and Profit Confidential, visit www.lombardipublishing.com.
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