Road Warrior

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

RSS

 

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.

Discuss this Blog Entry 10

on Mar 11, 2014

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.
outlook 2010 problems

on Oct 5, 2014

Good blog post i enjoyed it thanks for this post - perfect money hosting / cheap web hosting

on Aug 28, 2014

I like this web site very much, Its a rattling nice place to read and obtain info . "Anyone can stop a man's life, but no one his death a thousand doors open on to it. – Phoenissae" by Lucius Annaeus Seneca.
Amazana Serpong Residence | cream pemutih muka | Grosir Baju Korea | Rumah Di Alam Sutera

on Sep 23, 2014

This is very educational content and written well for a change. It's nice to see that some people still understand how to write a quality post!

on Sep 23, 2014

Hello,I love reading through your blog, I wanted to leave a little comment to support you and wish you a good continuation. Wishing you the best of luck for all your blogging efforts. studio videochat bucuresti

on Jul 18, 2014

To the one who makes all of my dreams come true! [ chase locations | usps locations | western union locations | | ups locations ]

on Aug 12, 2014

Having read this I believed it was rather informative. I appreciate you taking the time and effort to put this information together. I once again find myself spending a lot of time both reading and posting comments. But so what, it was still worth it! http://jualapartemenmurah.com

on Apr 16, 2014

How long the Federal Reserve will continue their “easy money” policy? - The answer is not long more. Tax payers are pretty angry already and I think many marshrutka drivers and farmers could have wished for more funding too.

on Apr 24, 2014

it's really nice and meanful. it's really cool blog. Linking is very useful thing.you have really helped lots of people who visit blog and provide them usefull information.
http://gelfoammattressreviews.jimdo.com/

on Sep 12, 2014

Whenever anyone proactively reach out in order to "How Long Will Federal Reserve Continue "Easy Money" Policy?" to get them to help resolve The idea issue, a person really save MY butts because otherwise The idea would have recognized another a couple of hours. brilliant job
harga besi wf 2014

Post new comment
or register to use your Corn and Soybean Digest ID
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.

Blog Archive

Sponsored Introduction Continue on to (or wait seconds) ×