Official Who Implemented QE1 For Fed Warns Major Turmoil Is Coming – What Fed is Doing is “Quite Shocking”

In the aftermath of the Fed’s decision to taper another $10 billion, 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 stun KWN readers around the world. He warned stocks will collapse if the Fed continues on the current course, and he also stated that what the Fed is doing is “quite shocking” and it may very well end in disaster. Below is what Huszard had to say in this remarkable interview.

Eric King: “Andrew, you are a former Federal Reserve executive and you were called upon to execute QE1. You also set up the Fed’s massive trading room. When you see the Fed cut another $10 billion of QE and you look at where we’ve been and where we are headed, what are your thoughts?”

Huszar: “When I look back to 2008, I never thought we would be where we are today. I thought QE was an emergency program to stabilize markets. But I never thought we would see more than $5 trillion of bond purchases at this point, or a Fed balance sheet that’s at $4.4 trillion, compared to $800 billion pre-financial crisis. So this is really uncharted territory that I find quite shocking….

“I think there are three big questions that need to be addressed: Today was pretty much as I expected, which is the Fed on cruise control, but they are still not prepared to make the big decision as to where to go from here. So there are questions that remain unanswered, but maybe the notes in three weeks will help.

It’s clear that QE is going to end in October, but there is a real question as to what the Fed does afterward with its portfolio. Does it keep the portfolio steady? Are they going to keep on purchasing bonds to keep the QE portfolio at its current level? Or are they going to let it pay down? If they let it pay down, then that’s a pretty major step in terms of starting to step away from the market.

Then there is the question as to when they will actually begin to raise short-term interest rates. My bet is that it will be longer than most people think. The third question is: How will they raise interest rates? Because the Fed funds rate as a tool really doesn’t work in an environment in which you have almost $2.5 trillion worth of excess reserves in the U.S. banking system.

So the Fed really is in uncharted territory in terms of how it deals with its balance sheet when it actually decides to stop buying. I think those are massively important questions and have huge implications for the Fed and how it actually tries to step away from the market, if it tries to step away from supporting the market.”

Eric King: “The question on everyone’s mind is: How will the markets trade when the Fed eliminates QE? How will things unfold?”

Huszar: “First, I think people are always overestimating how quickly the Fed is going to end easy money. Remember that in 2008 people were talking about the Fed raising rates in six months. They are overestimating the influence that hawks like Fisher and Plosser have on the Fed. This is a highly dovish Fed.

So I think it could actually take some time for the Fed to meaningfully step away. But when the Fed finally steps away, I think we are in for a rocky ride. I remember before 2008 when we were talking about how we would solve the issue of volatility — that’s the moment when volatility spikes.

So when the Fed actually pulls away the punchbowl, I think you are going to see massive volatility. I don’t see the 10-Year going to 5, 6, or 7 percent immediately. But what I do see is massive volatility and a loss of positive psychology. This confidence that everyone talks about coming out of this easy money, this artificial stimulus, it can just as easily disappear as quickly as it built up. If the Fed really pulls away, it will be an impossible situation in terms of preserving positive expectations.”

Huszar added: “To this day I don’t believe the Fed is most worried about inflation. Inflation is rising but the Fed still has room to run. The problem they have is that the economy is not working for most of Main Street.

Yesterday we had a 4 percent GDP print, which looks good on paper, but the wage of the average American just fell down to where it was in 1989 on an inflation-adjusted basis. So you have more Americans being left behind. The problem has been that the Fed’s tools really haven’t worked and also there are a number of unintended consequences from what they are doing.

I think we are in a longer period of economic malaise. The struggling economy is something that will continue for an extended period. I think a lot of what the Fed did in the financial crisis was justified — I don’t want to re-litigate that. But I think a what they have done since the end of 2009 is questionable.

I think we will look back and say they squandered an opportunity to get the economy working for all Americans. So I think these struggles are going to play out for a long time and it’s going to be a painful journey to get things turned around.”

Eric King: “I know last time we spoke you felt the stock market was going to see a 20-30-percent plunge at some point. How much worse is it going to be now that the Dow has plowed through 17,000 and we are hanging near that level?”

Huszar: “Let’s not forget that the Fed is still buying $25 billion of bonds each month and pumping money into the markets. But the plunge in stocks is coming. There will be an expectation of a ‘Yellen put’ under the market. But if Yellen is true to her word and the Fed really takes a step back and is willing to let more volatility enter the stock market, you will see that kind of 20-30-percent correction.”

Eric King: “Could it be far worse than what you are predicting?”

Huszar: “Yes. The U.S. is 70-percent dependent on consumer spending. The problem is that the vast majority of Americans have less wages to spend and are more or less tapped out on credit. People are only 10 percent less indebted than they were pre-financial crisis.

At some point you need a functioning Main Street for the economy to thrive, and I really don’t see that in any meaningful way more than five years after the collapse of Lehman Brothers.”

Source: King World News