Obama's Grip on the Fed
Research for Online Investors

by John Dalt

10/05/10

The Federal Reserve has two new members today.  Janet Yellen is the new Vice-Chairman; she is joined by Sarah Raskin.  Yellen is from the San Francisco Federal Reserve Bank, Raskin was Maryland’s commissioner of financial regulation.

Both were appointed by President Obama.  Bernanke was reappointed last winter, and Peter Diamond is awaiting confirmation by the Senate.  Mr. Diamond is an economist at the Massachusetts Institute of Technology.

This means President Obama now has three members on the seven member board, with Diamond on deck.  One seat is open waiting for his confirmation.  We can hardly imagine a cozier situation.

This is Janet Yellen’s second time to the plate at the Federal Reserve.  She was appointed by President Bill Clinton and served on the board of governors from 1994 through 1997.  She is seen as an ‘inflation dove’ and was opposed in her confirmation by senators concerned about over-inflating the economy.  She replaces Donald Kohn, who was viewed as a moderate dove on fiscal policy.

The Fed is ready to initiate a new round of quantitative easing.  The board meets again on November 2-3.  The latest discussion focuses on starting with a ‘modest’ amount, maybe $100 billion.  Last year the Fed expanded their balance sheet approximately $1.7 trillion in the first round of quantitative easing.

The market has rallied on the prospect of more money pumping into the economy.  Will it go any further than the bank balance sheets?  Recent history tells us it will not, but in true government fashion, if a program doesn’t work “increase the budget.”

The dollar has been beaten down in anticipation of QE2.  Now might be a good time to look at a purchase of the UUP ETF.  This tracks the value of the U.S. dollar.  We think there is a quick bounce coming in the near future.

It won't save the dollar from its eventual demise, but could make a nice trade.  We covered what is driving the current rally in Falling Dollar, Rising Market.

To the Mailbag:
The old golden rule is alive and well. Those that have the gold (China) make the rules.  Everything changes but nothing changes.--- paid up subscriber J.P.

John’s reply:  Did Confucius say that?

What will happen when the U.S. can’t borrow money?---paid up subscriber T.M.

John’s reply:  Inflation.  Protests over austerity plans by government.  Watch what is happening in Greece, Ireland, Spain...it will happen here...probably much worse.  Dangers....cuts in defense spending that leave us vulnerable.  We are not going to be the big dog on the block, and will not be able to afford projecting our might overseas all the time.  Less foreign aid, and our former "friends" will turn on us...the only reason they went along at all was because of the bribes we paid them in foreign aid.

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.

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