Fed Steps Up Printing
Research for Online Investors

by John Dalt

11/04/10

The Federal Open Market Committee (FOMC) committed to buy $600 billion in treasury bonds yesterday to lower borrowing costs for consumers and businesses, according to Reuters.  The Fed will buy $75 billion per month through the second quarter.  They will also use approximately $300 billion from refunded securities to make additional purchases.

Where do I drop these bundles of money?

The purchases will be concentrated in the ‘middle’ range of maturities.  The market knocked down the prices on five and ten year bonds.  The twenty and thirty year appear to be outside the range of planned purchases.  Interest rates on thirty year bonds increased in afternoon trading.

The Fed fears the economy is not growing fast enough to turn the corner on high unemployment.  Last quarter’s growth came in at 2% and unemployment has stayed at 9.6%.  Economists believe the economy must grow faster than a 2% rate for companies to expand and hire more workers.

The Fed’s two primary objectives are price stability and maintaining maximum sustainable employment.   The Fed believes there is a danger of deflation, and unemployment is too high.

In addition to the $75 billion in new purchases the Fed will make each month, they will also reinvest money from bonds that are refunded (maturing) each month.  This should add another $30 to $35 billion in purchasing capacity.

Bernanke does not believe this round of quantitative easing will lead to inflation.  He writes in the Washington Post “We have made all necessary preparations, and we are confident that we have the tools to unwind these policies at the appropriate time.”

We have read, and agree, that the Fed is weary of working to support the economy.  There are voices on the FOMC that do not agree with the current approach.  The congress and president have increased the deficit and do not have a budget or a plan in place to bring future spending in line with receipts.

Bernanke closed his article in Today’s Washington Post with a statement that should get our leadership’s attention.  “The Federal Reserve cannot solve all the economy's problems on its own. That will take time and the combined efforts of many parties, including the central bank, Congress, the administration, regulators and the private sector.”

Politicians and bureaucrats don’t understand; the private sector does not have a ‘group’ responsibility to solve the economy’s problems.  Individual’s (and companies) take action in their own economic self interest.

The government is responsible to be good stewards of the trust placed in them.  Only from this fulcrum can good monetary policy encourage the private sector to expand.

I came across this chart showing the gains from Halloween to the end of April compared to the gains from May through October.  This is on the S7P 500 index.  Historically, this performance is compelling.  Notable exceptions were during the oil embargo of 1973-74, the dot-com bust of 2000-01, and the financial meltdown of 2007-2009.

To the mailbag:
Excellent article, thanks.---paid up subscriber’s wife J.F.

Don’t worry, you are not the first to point out the failed policies of this administration that has been called racist.—paid up subscriber D.F.

John’s reply:  Trip cost estimates are coming in.  Obama’s trip to Asia is going to cost $200 million PER DAY.  10 days = $2 BILLION dollars.  Wow…imperial presidency…let ‘em eat cake.

QE2 is either amazing or a conspiracy…we do not need to be worried about being destroyed from abroad; we are doing it to ourselves…elections make no difference when portions of our government can act independently…there is no balance of power (where the Fed is concerned).---paid up subscriber R.A.

Editor’s note:  Gintare sends her thanks for subscribers that have viewed  gintarejewelry.com

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

MarketToday Archive

Back to Top