Don’t Expect Tightening from the Federal Reserve

On Wednesday, Federal Reserve officials conclude their two-day monetary policy meeting. Speculation has been rising that the central bank might soon give the printing presses a break, but a weak economy and currency wars are still providing plenty of cover for bond purchases.

Last month, the Federal Reserve started to inject the idea that policymakers were divided about conducting bond purchases beyond this year. The Federal Open Market Committee December minutes stated, “Several others thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet. One member viewed any additional purchases as unwarranted.”

The Federal Reserve is known for talking a good game, but at the end of the day, the markets are addicted to quantitative easing and record low interest rates. Growth in the United States and other developed countries is still weak. The latest reading from the Commerce Department shows that gross domestic product in the U.S. decreased for the first time in three and a half years during the fourth quarter. Earlier this month, the International Monetary Fund downgraded its outlook for global economic growth to only 3.5 percent. The organization also expects the eurozone to spend another year in recession.

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Other central banks are doing it…

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It is also important to note the Federal Reserve does not operate in a vacuum. Central banks across the globe are engaged in a massive currency war. When converted to U.S. dollars, the four major central banks have expanded their balance sheets to more than $13 trillion, according to Hayman Capital. In comparison, the amount was $3 trillion 10 years ago. Central banks now account for at least a quarter of all global gross domestic product, a sharp increase from only 10 percent in 2002. Is Ben Bernanke really ready to wave the white flag of currency devaluation defeat?

Late last year, the Federal Reserve announced QE3, which was followed by QE4 only three months later. In total, the central bank is purchasing $85 billion in bonds per month, a move that has pushed its balance sheet to record highs. According to the latest statistical release, the Federal Reserve’s balance sheet is now above $3 trillion and looks set to test $4 trillion within a year.

In a Bloomberg survey of 44 economists, the Federal Reserve’s bond buying is expected to reach $1.14 trillion by the first quarter of 2014. Meanwhile, Morgan Stanley believes policy makers will keep bond-buying programs in place for another two years, which could push the Federal Reserve’s balance sheet to a whopping $5 trillion.

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Disclosure: Long EXK, AG, HL, PHYS