In the aftermath of the Fed announcement that they are officially ending the asset-backed purchase program know as QE, today King World News spoke with the man the Fed called on to execute QE1 and who also set up the Fed’s massive trading room, former Fed member and former Managing Director at Morgan Stanley, Andrew Huszar. What he had to say will surprise KWN readers around the world. Below is what Huszard had to say in this powerful interview.
Andrew Huszar: “What happened today with the Fed was expected. The Fed has been angling for the end of QE for quite some time. The reality is that they are not entirely ending QE. As I mentioned to you previously, the Fed is committed to maintaining the current size of its portfolio. As some of their bonds mature, the Fed will be going out and buying bonds to replace them. So we will still see the Fed buying hundreds of billions of dollars of bonds each year….
Continue reading the Andrew Huszar interview below…
“But obviously the Fed is not further expanding their stimulus at this time. It will be extremely interesting to see how the markets accept this. After the end of QE1 and QE2 we saw the market fall about 20 percent in each instance. In this case, obviously the Fed tapered somewhat, but I still believe, especially if the data does not improve, that we are going to see the markets test the Fed.”
Eric King: “So expect more downside action in the stock market to test the Fed’s resolve?”
Huszar: “Yes. When I was at the Fed executing QE1, we had this issue where we were buying mortgage-backed securities. But there always comes a technical point in the market where the price action hits a resistance line and the market would push beyond that level to see how the Fed would react. So this time I expect the markets to test the Fed by taking the stock market significantly lower than current levels.
I see a tug-of-war between the Fed and the market because the Fed ultimately does want to disengage from being so active in key markets. Today the Fed used language which implied that they may raise rates sooner. I strongly believe that the market will effectively push back against the Fed and this will create bouts of enormous volatility. We have already seen this twice in the past three months, but I expect this volatility to become greater and greater.
So we will see bouts of intense volatility, followed by calm, followed by even more intense volatility. And that is the point where the Fed will be tested in terms of whether it can live with that degree of wild trading taking place in major markets.”
Eric King: “What’s the great risk going forward, Andrew?”
Huszar: “That’s a great question. The great danger is that the Fed stimulus has pushed the markets to unsustainably high levels. And so in the short- to medium-term we could see a pretty significant selloff in the markets. This may not be to the degree that we saw in 2008, but something that would get the level of fear rebounding once again.
QE hasn’t really helped the macro-economy very dramatically, so by extension I don’t believe the end of QE will really hurt the macro-economy. What I am saying is that the real downside here is in terms of confidence. The reality is that confidence in markets has been artificially stimulated in the last few years by the Fed. Now we could see the opposite situation — that confidence is ultimately undermined by the Fed. This will mean that the world is in a much less happy place in terms of the markets. This will also have a major impact on credit expansion in America.”
With the U.S. dollar strengthening and gold continuing to struggle after the Fed’s announcement, Huszar added: “I continue to believe that gold has to be part of any diversified portfolio. I also believe that gold as a long-term investment is just fine.” You can follow Andrew on twitter @andrewhuszar.
UPDATE – KWN has many more interviews being released today.
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The audio interviews with Bill Fleckenstein, Rick Santelli, Rick Rule, Michael Pento, Paul Craig Roberts, Andrew Huszar, Andrew Maguire, MEP Nigel Farage, John Mauldin, Egon von Greyerz, Michael Belkin, and Marc Faber are available now. Other recent KWN interviews include Jim Grant and Felix Zulauf — to listen CLICK HERE.