Against the wishes of many republicans in congress, the Federal Reserve announced today that it would use its portfolio of $2.85 trillion in bonds to purchase $400 billion of longer-term treasuries. This move would push long-term rates down creating stimulus in the mortgage market by pushing 30 year mortgage rates down. The Fed hopes that this will create more refinancing which will free up consumer’s cash and create more buying of consumer goods.
The only problem I see with this is that the percentage of Americans that can actually refinance is very small compared to prior to the 2008 subprime crisis. Credit is tighter then it has been in years. The Fed needs to loosen lending standards in order to stabilize the real estate market and make it easier for people to refinance. So the question will be how well will this work?
“Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated,” Fed said in its statement. The Fed wants to keep the economy from weakening further, which is an acknowledgement to just how precarious of a situation we are in.
The official unemployment rate is at 9.1% (which doesn’t include people that have given up on looking for work), business and consumer confidence is down and the sovereign debt crisis in Europe is getting worse.
This move is also expected to push investors out of treasuries and into riskier assets like stocks due to low returns in treasuries. Investors will naturally try to increase returns elsewhere. Therefore the stock market could rally short-term on the news.
Many economists argue that the Fed is running out of ammunition to fight the economic woes of the US, but clearly they are going to continue to try. The only problem with more stimulus, if it includes money printing, is that it will only weaken the US in the long-term by devaluing the currency. Now this may be good for trade and government spending, but the purchasing power of your dollar is most certainly going to be less in the future.
For this reason gold is a great way to protect your purchasing power. Large institutional buyers, like hedge funds, have indicated that further easing by the Fed will trigger more buying of gold. John Burbank, who runs George Soros’s big hedge fund – Passport Capital, announced this on May 13, 2011. The Fed is going to continue to stimulate the economy despite the fact that many republicans have urged it not to, therefore gold still shines, unlike the Federal Reserve.