Be the first to like this
Economic Boost from Federal Reserve Bond Purchases
Investors can expect an economic boost from Federal Reserve bond purchases scheduled to start today. At it latest meeting the US Federal Reserve agreed to an extended economic stimulus program guaranteed to last well into an economic recovery. The base of the program will be the purchase of $85 Billion a month in bonds up until December of 2012 and then $40 Billion a month indefinitely. The strategy is to lower interest rates, improve the housing market, and provide an economic boost from Federal Reserve bond purchases. According the Chairman Bernanke the Fed intends to keep interest rates ultra low until at least mid 2015. The Fed is predicting three percent or better growth and an unemployment rate of 6% by 2015. A key aspect of fundamental analysis of stocks is that lower interest rates tend to promote growth and prosperity. An economic boost from Federal Reserve bond purchases could be the key to a sustained American recovery.
A Billion Here and a Billion There
A tongue in cheek comment by the famous Illinois senator Everett Dirksen was, “A billion here and a billion there and pretty soon you’re talking real money.” This was when billion dollar deficits were something that Americans worried about. Now the prospect of an economic boost from Federal Reserve bond purchases has stock markets rising all over the world. In its policy, known as Quantitative Easing, the Fed plans to drive up bond prices, reduce interest rates, and reduce the number of bonds available for purchase. This is intended to drive investors into the corporate bond market and pump money into US industry. The expectation of the Fed is that banks will loan more money to individuals and companies as bonds become harder to come by.
More individual borrowing at very low rates is expected to drive up home sales, the purchases of big ticket items such as cars, and result in greater business spending and more jobs. The longer term aspect of what is essentially a process of printing money in order beef up the money supply will likely be the decrease in value of the US dollar. Over the long term a billion here and a billion there will likely drive up the price of oil and other commodities. Critics of the policy have picked up on this and say that QE guarantees inflation along the way. After all debt and growth are only connected in the short term. In the long term debt chokes off growth.
The Fiscal Cliff
Despite the good news of an economic boost from Federal Reserve bond purchases there is another ominous issue aside from a pending surge of inflation. The Federal Reserve Chairman has noted that it is essential for congress and the president to come to agreement on spending cuts and getting rid of tax cuts already scheduled to expire at the end of 2012. Those who see inflation coming may want to get busy investing in oil or investing in gold.