The Fed Banks On Moderate Inflation

Bernanke continues easing policy for the near term

   

In a move that surprised essentially no one, the Federal Reserve voted 11-to-1 to stay the course in terms of its zero-interest rate policy. The Fed will continue to buy back $85 billion in bonds each and every month, at least until the nation’s unemployment rate hits 6.5%. With the current unemployment rate around 7.7%, the Fed believes that we will cross this threshold sometime in 2015.

In response, Wall Street held steady during the last hours of the trading day—the Dow ultimately closed up 56 points. The reality is that the stock market is now addicted to the Fed’s easy money policies, so some were undoubtedly relieved that the pump will remain on.

But while investors may celebrate this move, the Fed’s money pump does hasten commodity inflation and the eventual decay in the U.S. dollar. Recently, the U.S. dollar got its mojo back after Britain was downgraded by Moody’s and thanks to concerns about the Italian election. In the past month, the dollar has gained over 4% against the Euro and 2% against the British pound. However, it looks like the dollar’s newfound strength is about to reverse course; it declined against most major currencies following the Fed’s latest announcement.

So what’s the key takeaway from the Fed action? Well, the Fed’s money pump is going to be on for at least the next couple years. As investors, we need to recognize that the stock market is the primary beneficiary. (And as I mentioned yesterday, the bond market will be hit.) So you’ll want to stick with stocks that boast strong dividends and hefty stock buyback programs.

Next week, we’ll see just how effective Quantitative Easing and Operation Twist have been for jump starting the economy. On Thursday, March 28, the Commerce Department releases its latest estimate for fourth-quarter economic growth. If you remember back to last month, the last estimate called for 0.1% growth, thanks to stronger consumer spending and business investment as well as a decline in imports. Since then, we’ve received favorable data on business inventories but negative data on the trade deficit, so it’s hard to tell how the next reading will fare.


Article printed from InvestorPlace Media, http://investorplace.com/2013/03/the-fed-banks-on-moderate-inflation/.

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