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The Federal Reserve also added to the negative sentiment by suggesting that policymakers were divided about conducting bond purchases beyond this year. The latest Federal Open Market Committee 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.”
However, the Fed is walking a swaying tightrope. The central bank jawboned financial markets for many months before finally unleashing a third round of quantitative easing in September, which was followed-up with QE4 only three months later. Why wouldn’t it try to keep inflation expectations or a distorted market somewhat in check by giving the appearance of monetary tightening? While some may think the Fed is trying to give subtle hints of an exit, it is hard to see the central bank stepping aside as it is estimated to absorb about 90 percent of net new dollar-denominated fixed income assets in 2012.
Additionally, the global economy still remains heavily dependent on central bank money printing and record low interest rates. The race to debase currencies is taking place around the world. 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. Could Ben Bernanke and company really be ready to pull the plug?
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