The Daily Ticker Blog

The Fed Has No Exit Strategy: Analyst

Stacy Curtin

The Federal Reserve concluded its last policy meeting of 2012 Wednesday and vowed to continue its stimulus programs to the tune of $85 billion a month in mortgage-backed securities and bond purchases.

The U.S. Central Bank also pledged to keep interest rates near zero until the unemployment rate falls to 6.5% and inflation remains stable at around 2%.

Related: Why the Fed Deserves Credit for the Economic Recovery

Chairman Ben Bernanke predicts hitting those targets sometime in 2015. But many are skeptical that the economy can improve at such a rapid clip and are questioning what his assumptions are based upon.

Miller Tabak's Peter Boockvar wrote this in an email note yesterday:

"If I was able to ask Ben Bernanke a question at today's press conference, I would ask this: What in your models make you believe that GDP growth can accelerate to a range of 2.3-3% in 2013, 3-3.5% in 2014 and 3-3.7% in 2015 from 1.7-1.8% in 2012 but somehow forecast that PCE inflation will be no greater than 2% in each of those years vs 1.6-1.7% in 2012 in light of the massive expansion in your balance sheet?"

John Mauldin of Mauldin Economics and author of The End Game, is also skeptical and joins The Daily Ticker's Aaron Task in the accompanying interview.

Mauldin says there are a lot of assumptions baked into the Fed's targets and questions whether or not the economy is poised to improve at such a rapid pace. He predicts it will take much longer than 2015 for the U.S. jobless rate to drop more than a percentage point.

The economy added 146,000 nonfarm payroll jobs in November and the unemployment rate fell to 7.7% from 7.9%. The economy would need to add more than 200,000 jobs a month to hit the Fed's target of 6.5% in the next two years.

Mauldin also points to the inevitable tax hikes that are likely to occur next year, which will put a strain on capital formation and hinder job growth.

"It is all about your assumptions and the unemployment rate is based on your concept of what the participation rate is," he says. "We've seen the unemployment rate come down but that is because the participation rate is still dropping."

To his point, when the participation rate falls so does the unemployment rate. That's because when people who cannot find jobs become discourage they just stop looking for work and are no longer counted in the participation rate. The participation rate fell 0.2% to 63.6% last month.

At the same time, Mauldin says that the Fed's forecast does not include the possibility for another recession, which could be triggered by the slighest economic shock from China or Europe.

As a result, Mauldin predicts that the economy will persist in its weakened state for some time to come. He says investors can expect a low-interest rate environment for the foreseeable future and very likely until 2020.

"They have no good exit strategy," says Mauldin of the Fed and its perpetually easy monetary policy.

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