August 10, 2011
There's an old saying in the economic-analysis field (sounds scintillating, doesn't it: economic analysis) that the Federal Reserve has the ability to "take away the punchbowl." The meaning is that when the Fed provides cheap money (read: low interest rates) it causes a party in the financial markets. Low rates tend to be good for the economy, and for stocks and bonds. So when the Fed is considering raising rates, they are said to be taking the punchbowl away, or ending the party in the markets.
Late yesterday, after seeing US stock markets drop nearly 20% over the last few weeks, the Fed essentially bolted the punchbowl to the table and promised free punch for the next two years. The FOMC stated it would keep rates "exceptionally low" through 2013. After the announcement stocks dropped sharply and then, as traders did a double take on that unusual language, stocks turned and soared, with markets closing up 5% in a welcome relief for investors.
Easy money may be a real help to our limping economy. But free punch in big gulps can come with a cost: a hangover is always possible. And that hangover might be inflation. Watch the price of gold as your barometer for that. Much as we hate unemployment and stock market volatility, if inflation comes back we'll hate that more.
(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).