Road Warrior

How Long Will Federal Reserve Continue "Easy Money" Policy?

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The stock market recently bounced to a record high of 15,000. Central banks around the world are opening up the floodgates of stimulus. In my road warrior travels, I have noticed numerous people are concerned about how long the Federal Reserve will continue their “easy money” policy. What are some of the signals to watch for in anticipation of a pullback by the central banks, which could result in not only a correction in the equity markets, but also in farmland values?

Concerning central bank stimulus, pick your poison: inflation or deflation. Ben Bernanke, the Fed chairman, and his predecessor, Alan Greenspan, are more concerned about deflation given the government debt levels here and abroad in developed or rich nations. The Federal Reserve’s aggressive strategies of buying back bonds and previous stimulus packages were to induce the wealth effect. Simply put, every time a stock increases by $1 in value, consumers tend to spend 4¢ more. The wealth effect is more dramatic with real estate. Spending increases 9¢ with every dollar real estate values appreciate. With 71% of the U.S. economy driven by consumption and services, record stock prices, rebounding housing prices and farm real estate values spiraling upward, the wealth effect is in full bloom. Similar strategies are being carried out Japan and other areas of the world.

When will the Federal Reserve attempt to pull back stimulus? Carefully watch the language of the Fed’s distributed comments. Comments suggesting less accommodative action will usually precede the action by three to four months. Watch three metrics that the Fed has identified in an attempt to become more transparent.

  • The target is 6.5% reported unemployment. Remember, the real unemployment rate trends tend to be approximately twice as high when discouraged and dislocated workers are included.
  • The next metric is inflation, which includes core inflation – without food and energy included – and headline inflation, which includes food and energy. Rates of core or headline inflation above 2.5% would suggest possibly tightening of stimulus packages.
  • A metric not officially identified but closely watched is gross domestic product (GDP). The current rate of growth in the U.S. as of the first quarter of 2013 was 2.5%. A rate in the 3-4% range would be indicative of a possible rate increase.

It appears that the typical May correction of the equity and stock markets may find the bears in hibernation. Do not discount a correction in mid- to late summer if the economy and unemployment improve and the Federal Reserve decides to reduce stimulus to the economy. The question then becomes, how will this impact farm real estate markets?

 

Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at sullylab@vt.edu.

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Interesting article!! The Federal Reserve will pull back the “Easy money” policy in a short time. The fed officials will be hoping to improve the economy in the months in order to justify their policy. Thanks a lot for sharing.
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What's Road Warrior?

Dave Kohl is an ag economist specializing in business management and ag finance. He can be reached at sullylab@vt.edu.

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