Jump to navigation

Free Newsletter Modern Trader Follow

Main menu

  • Futures
    • Modern Trader Magazine
    • Commodities
    • Futures Mag Archives
    • ETFs
    • Financials
    • Forex
    • Managed Funds
    • Market Analysis
    • News
    • Options
    • Regulation
    • Technology
    • Trading Strategies
    • Education
    • Futures Op-Ed
  • Favorites
    • Alpha Pages Most Popular
    • Futures Magazine
    • Modern Trader Magazine
    • Most Popular
    • Slideshows & Lists
    • Special Topics
      • Alpha Hunters
      • Bad Boys
      • FINtech
      • High-Frequency Trading
      • Trader's Life
      • Trading Strategies
      • FUTURES MAG's 500th ISSUE
      • We asked traders
  • Traders
    • Market Data
    • Hot Charts
    • Interactive Charts
    • Trading Calendar
  • FINalternatives
  • Hard Assets
    • Home
    • Base Metals
    • Precious Metals
    • Rare Earth Metals
    • Commodities
    • Mining Investments
    • Slideshows
  • Modern Trader
    • Subscribe
    • Past Issues
  • All +
    • Follow Us +
      • FuturesMag
      • Newsletters
      • Facebook
      • Google+
      • Linkedin
      • Twitter
      • RSS Feeds
    • About Us +
      • About
      • Advertise
      • Contact
      • Contribute
      • Privacy Policy
  • !
Follow Futures          
       
more >>

We Asked Traders

We asked traders for their opinion on the launch of bitcoin futures

Sponsored Content

Trading

Equities.com launches unlimited trading via Tradier Brokerage, Transforming into a news & fintech portal

Featured Topics

more Commodities>>

Commodities

Energy demand steps back in play
Advertisement
more Volatility>>

Volatility

Volatility & opportunity in the energy sector
Daily Price Action: E-mini S&P 500
more Options>>

Options

Trading Vertical Option Spreads

Advertisement

Did you hear the one about the Fed preventing bubbles?

SPONSORED CONTENT

By Greg Adamsick, Matthew Bradbard

January 22, 2014 • Reprints

Outgoing Federal Reserve Chairmen Ben Bernanke recently said that, at present, the Fed is not overly concerned with the danger of bubbles forming in the financial system, although he stressed that the Fed is “watching vigilantly” for such risks. Based on the Federal Reserve’s track record, surely there would be no bubbles if they truly had such foresight. 

Soon we will forget the credit crisis and the housing market debacle. What will be the next shoe to drop?  Cynics may suggest that Bernanke can afford not to be concerned with bubbles forming in the markets, because in a few weeks’ time, it will no longer be his chief concern. Broadly speaking, market valuations appear to fall within historical ranges as matters stand right now, however that should not be viewed as comforting, in and of itself. Perhaps most worryingly, at present, we are quick to fabricate reasons for bad numbers coming out. For instance, adverse weather was blamed for the December 2013 non-farm payrolls hitting a three-year low, really? In our eyes, it is the Fed’s bond buying program that poses the greatest threat to the economy and the inherent risks of financial instability that it brings with it. Too big to fail comes to mind. So let’s examine where we are and where we are headed.

The Fed has been holding short-term interest rates near zero since late 2008, and at the same time, it has been buying long-term bonds to lower borrowing costs, with the aim of boosting growth and lowering unemployment. Interestingly, deflation has been a bigger concern than inflation as a result – but will this continue in the quarters and years to come?

At its December 2013 meeting, the Federal Open Markets Committee (FOMC) decided to begin tapering its bond buying program. However, the Fed made clear that it remains committed to keeping short-term interest rates near zero so long as unemployment figures remain above 6.5% and inflation is well contained, and perhaps beyond that. A poll of economists recently indicated that more than two thirds do not foresee a change in Fed policy, even with Yellen at the helm.

When the Fed finally did embark on its much talked about tapering process, it did so with a $10 Billion reduction in monthly bond purchases, down from $85 billion. Expectations are that they will continue this trend with a further $10 billion reduction announced at each forthcoming meeting, bringing the process to an end in the last quarter of 2014. Note also that the Fed spent the better part of last fall trying to convince market participants that the “tapering process” is not “tightening.”  

Hopefully, at this point, there remains little confusion about the difference between “tapering” and “tightening.” “Tapering” simply means reducing the amount of bond purchases made by the Fed, as started during QE3 in an attempt to keep long-term interest rates low. In contrast, “tightening” refers to increasing the Federal Funds rate, which is the target interest rate banks charge each other to borrow funds overnight. The concepts described above quite clearly differ from one another. While tapering is already under way, tightening will follow suit soon, likely next year. The Fed made a point of stressing that they will be accommodative for a long time. According to the Fed’s own forecasts, actual tightening is projected to begin mid-2015. And the Fed will remain accommodative until the Fed Funds Rate has reached a level of 2%. Of course, being accommodative also means ongoing reflection on the true state of the economy, making Fed action highly “data-dependent”. 

We believe that with Bernanke handing the Fed Chairmanship to Yellen, the dynamics of the Fed are about to change to a great extent than what is currently priced into the markets. Bernanke’s eight years will be studied and written about for years to come. Bernanke began his career at the Fed being already known as an accomplished academic and an expert on The Great Depression, knowing full well that his expertise would be tested. The financial crisis hit hard in 2008, and Bernanke proved himself under pressure as he implemented unconventional plans to inject stimulus and stabilize the economy: under his leadership, the Fed lowered rates until they could not be lowered anymore, bailed out banks, created international swap lines, committed trillions of dollars to large-scale asset purchases and engaged, how can we forget, in “Operation Twist”. From the very start, Bernanke also made a commitment to increasing transparency, so that the markets could more fully understand and appreciate the Fed’s intentions and actions. To achieve this, Bernanke did not shy away from unconventional methods: he went so far as to go on 60 Minutes to explain the Fed’s role to the general public. All of this proved very helpful in providing the markets with much-needed confidence during the crisis. As is the case with many who have made tough decisions in high-profile positions, it will be many years before we can truly understand the wider effects of Bernanke’s policies.

Yellen takes over at the upcoming January 28-29 FOMC meeting, and by all accounts the transition is expected to be smooth. Yellen has a long track record at the Federal Reserve. She has been President of the San Francisco Fed since 2004, and her ties to the Fed go back all the way to 1977. Throughout the most recent crisis, she and Bernanke have worked together very closely, with Yellen voting along with Bernanke at all meetings.

Page 1 of 2
>>next >

About the Author

 

Greg Adamsick, Vice President of Global Futures & Options at RCM Asset Management, helps clients seize opportunities in the futures and options markets and satisfy portfolio needs. His passion for the markets was born on the CBOT and CME trading floors over 20 years ago. Relying on a combination of technical and fundamental indicators, Greg has developed a unique global macro perspective that helps him identify points of change in the markets. Greg Adamsick can be reached at gadamsick@rcmam.com.      

 

TRADING FUTURES, OPTIONS ON FUTURES AND RETAIL OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS INVOLVES SUBSTANTIAL RISK OF LOSS AND IS NOT SUITABLE FOR ALL INVESTORS. YOU SHOULD CAREFULLY CONSIDER WHETHER TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES, KNOWLEDGE AND FINANCIAL RESOURCES. YOU MAY LOSE ALL OR MORE THAN YOUR INITIAL INVESTMENT. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.


Related Articles
Daily Price Action: E-mini S&P 500
Daily Price Action: E-mini S&P 500
Daily Price Action: E-mini S&P 500
Daily Price Action: E-mini S&P 500
Daily Price Action: E-mini S&P 500
Previous
Rally or bust: Who knows the outcome of Fed tapering?
Next
In the land of ZIRP, look here for profits
Related Terms
US Federal Reserve 8527fed 3336financials 2975Interest Rates 2108Federal Reserve 1207bonds 1125Treasuries 1008Qe 751Obama 610Yellen 489Stimulus 475taper 310Bernanke 308Fixed income 302Notes 287Yields 202Richard Fisher 128Charles Plosser 116San Francisco Fed 63Yellen 33Jerome Powell 15Federal Open Markets Committee 12Lael Brainard 12Stanley Fisher 1Dallas Plosser 1

Free Newsletter Modern Trader Follow

Main menu

  • Futures
    • Modern Trader Magazine
    • Commodities
    • Futures Mag Archives
    • ETFs
    • Financials
    • Forex
    • Managed Funds
    • Market Analysis
    • News
    • Options
    • Regulation
    • Technology
    • Trading Strategies
    • Education
    • Futures Op-Ed
  • Favorites
    • Alpha Pages Most Popular
    • Futures Magazine
    • Modern Trader Magazine
    • Most Popular
    • Slideshows & Lists
    • Special Topics
      • Alpha Hunters
      • Bad Boys
      • FINtech
      • High-Frequency Trading
      • Trader's Life
      • Trading Strategies
      • FUTURES MAG's 500th ISSUE
      • We asked traders
  • Traders
    • Market Data
    • Hot Charts
    • Interactive Charts
    • Trading Calendar
  • FINalternatives
  • Hard Assets
    • Home
    • Base Metals
    • Precious Metals
    • Rare Earth Metals
    • Commodities
    • Mining Investments
    • Slideshows
  • Modern Trader
    • Subscribe
    • Past Issues
  • All +
    • Follow Us +
      • FuturesMag
      • Newsletters
      • Facebook
      • Google+
      • Linkedin
      • Twitter
      • RSS Feeds
    • About Us +
      • About
      • Advertise
      • Contact
      • Contribute
      • Privacy Policy
  • !
images