November 15, 2010
Last week the news was all about the Federal Reserve's Quantitative Easing plan, for short: QEII. The QEII plan is for the Fed to buy $600 billion of US Treasury securities - and to print dollars to do it. Bernanke's rationale? To drive interest rates lower in order to help economic recovery. I have to ask this: how much lower do they think rates can go? You can get a mortgage now below 4% - what is the Fed thinking?
One thing they didn't think through: the reaction of the marketplace. Textbooks say that if the Fed is buying bonds, bond prices will rise and interest rates fall. But what happened last week was that bond prices (and the US dollar) dropped sharply and rates rose. The reason is obvious. Investors are not mind-numbed robots living by their college economics text. When the markets saw the Fed printing money they did what any logical investor might do - get concerned about inflation. When you fear inflation you sell bonds since inflation robs your principal of purchasing power and bonds preserve, but do not grow, your principal. All the Fed action in the world cannot compensate for the unstoppable power of markets.
So now we have rising rates and the Fed printing more money. No thanks.
But don't despair - here is good news - the economy will do fine, slowly, if we leave it alone.
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).