If the Fed Doesn't Taper, What Happens to Gold, Stocks, Real Estate, Treasuries?

By Matt Machaj  SEP 17, 2013 12:10 PM

The economy has not improved sufficiently, and the Fed is likely to continue quantitative easing. Here's how it could affect various markets.


In my previous article, What If the Fed Does Taper QE? 8 Possible Scenarios, I focused on what the likely outcome of limiting the QE program would be on several key markets (gold, real estate, stocks, and bonds). Today I will provide you with an analysis for a completely different scenario: I'll discuss what’s likely to happen if the Fed simply continues the QE program and informs us about it in a direct way.
In short, you will find details in the table below – the above scenario is listed as the first in the table below (last week’s analysis focused on the fourth scenario).

The first case seems most probable based on the Fed's recent meeting minutes (from July 30-31; the minutes were published on August 21). The Fed is likely to continue its programs and communicate its messages openly without any misinformation. Such a scenario is indeed the likeliest one since despite negligible positive signs, the economy has not improved sufficiently. The decision will put upward pressure on real estate since the holding onto of mortgage-backed securities by the Fed should keep up the boost (however inefficient it may be).
In this scenario, the banking system will be covered from liquidity problems, and indirect subsidies to the banking system will be continued. The stock market should therefore grow. What happens to Treasuries? It depends mostly on inflationary expectations. In the short run, we should say that Treasuries would gain because one of the main buyers, the Fed, would keep them. Nevertheless, there is a possibility that they will lose value if the market expects this type of policy to lead to inflation. In this case, Treasuries could go down. However, the Fed would possibly step in again with some other tool to counter that (such as it did with Operation Twist). There are limits to such steps, of course. However, as mentioned last time, I do not see very high inflation on the horizon -- yet.
Gold should be on its upward track within a few months (if not sooner) because, upon the continuation of the intervention, it will probably be considered a good dollar alternative -- an anti-system hedge with the proper backup in the physical market.
If the Fed continues the QE program and it is communicated directly to the people, gold is likely to move higher within a few months.

Matt Machaj, PhD, is an economist whose research is focused on the monetary policy, the gold standard, and alternative monetary regimes. Matt is a university professor, blogger, publicist, founder of the Polish Mises Institute branch, member of Property and Freedom Society, and laureate of Lawrence Fertig Award

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