Why Federal Reserve Tapering is At Least 1.5 Years Away

In an exclusive interview with Benzinga, Dr. Chris Martenson explained why he thinks Federal Reserve tapering will not happen soon.

According to Martenson, tapering will occur in one and a half years at the earliest and five years at the latest. “They need to see either or both 2.5 percent inflation and a 6.5 percent unemployment rate. They are not going to see either of those things for a long time for a couple of reasons.”

Unemployment

Starting with why it will be harder than most expect to change inflation, Martenson stated: “For every one percentage tick down in the unemployment rate... you need about a million and a half jobs created. And that is just if all of the things remain equal.”

As Martenson explains, not all things will remain equal, several factors complicate decreased unemployment. “The participation rate is way down... a lot of excess capacity could be absorbed without the unemployment rate changing at all. We could create eight million jobs right now and bring the participation rate back up to what it was in 2006, and the unemployment rate wouldn’t change at all, zero.

“I think there are a lot of people who are out of work and would really rather be working, or want a better job. so those forces are going to serve to keep any changes in the unemployment rate very muted going forward.”

Inflation

“Inflation, [specifically] the way they measure inflation, they are not going to see [2.5 percent] it for a long time. A quarter of an inflation measure is what’s called ‘owners equivalent rent’. It doesn't actually measure the movement in house prices and really captures poorly building materials, labor costs, anything related to a housing recovery. Its a slower measure, so given that, I don’t think we are going to see a lot any inflationary pressures.”

Martenson also explained that people hawkish on monetary policy are popping up not because they are fighting inflation, but because “they are just worried about markets becoming conditioned to and addicted to market stimulus.”

Take Away

If Dr. Martenson spoke last week rather than Ben Bernanke, markets would have soared rather than fallen. Martenson is not seeing the economic data to support a reduction in the Federal Reserve’s bond buying program even though markets are up more than ten percent this year.