What Happens If the Fed Starts to 'Taper'

The Federal Reserve can't print money forever...

 

THE WAIT is over. The Federal Reserve will conclude its Federal Open Market Committee (FOMC) meeting today and, of course, all of you will know what Chairman Ben Bernanke's current thinking will be, writes George Leong of Investment Contrarians.

 

We have been hearing grumblings from other Federal Reserve members across the nation about how the voting members should consider tapering the Fed's bond buying.

 

While there has been no timeframe offered, the overall feeling, including mine, is that the Federal Reserve must have an exit strategy in place.

 

The economy is showing signs of improving in consumer spending, gross domestic product (GDP) growth, the housing market, and manufacturing; albeit, the jobs market is still not at the level that the Federal Reserve wants to see.

 

Yet I have been concerned about the flow of easy money, a flow that has helped to drive the global economy and stock markets.

 

Take, as an example, the big Ponzi scheme created in Japan through the adoption of "Abenomics" by the country's free-spending Prime Minister. The trillion-Dollar stimulus plan drove up the Japanese Nikkei 225, but the rate was way overblown. Japan's economy is showing signs of improving, but just like the US economy, the Japanese economy is artificial.

 

Wait to see what happens once they start tapering the monetary stimulus. The potential result from this tapering is why stocks were under pressure leading up to today's meeting. In Japan, when the Bank of Japan recently refrained from adding additional stimulus, stock traders ran for the exits.

 

Trust me: the same will happen here when the Federal Reserve announces its intentions, and it will be worse when they announce when the tapering might start. But this would only be the beginning of a potential stock market correction that will occur as interest rates and yields edge higher.

 

The Federal Reserve will not be able to print money forever. The stimulus will need to be tightened, but with advance warning and in an orderly manner.