Yesterday the Federal Reserve Bank declared that it will keep the money pump on in an effort to keep interest rates low. So the Fed will continue injecting $85 billion into the economy each month. To recap, $40 billion of this goes towards buying mortgage backed securities and at least $45 billion is for buying Treasury securities. (Fun fact: The Fed has bought back more Treasury securities than the Treasury has issued this year!)
In reading my email and talking to folks at my seminar events, I know that many are very nervous about what the Fed is going to do and how it will affect the Stock Market. So with the latest FOMC minutes hot off the press, let’s run down the top three questions I’ve received on the Fed.
Why Did the Dow Plunge Following the Announcement?
But while Quantitative Easing (QE) may plow on — for now — this announcement didn’t do much to ease Wall Street jitters. The Dow fell closed down 200 points following the announcement. That’s because Fed Chairman Ben Bernanke finally alluded to an expiration date for QE. If the economy continues to improve as expected, the central bank is looking to tap the brakes later this year and end QE entirely by mid-2014.
Is This a Sign To Get Out of the Market?
Not necessarily. This expiration is contingent on whether the unemployment rate falls all the way to 6.5% by then. A lot can happen between now and next year, and because inflation remains tame, I just can’t see the dove-dominated Fed getting out of the market anytime soon. So while Wall Street remains obsessed with the possibility of QE ending, I don’t expect it to happen under Bernanke’s watch. The market still has a good foundation under it — thanks to hefty stock buyback programs and juicy dividend yields — so I plan on staying fully invested.
What Will Happen When QE Ends?
If QE ends definitively, it will make all high-dividend stocks more volatile, especially mortgage REITs. What I expect would happen is that an initial shockwave would hit Wall Street. But if you stick with highly-rated conservative bets and dividend stocks, you shouldn’t have cause for concern. The way these stocks work is that they often go down with the market, but as soon as buying pressure returns they bounce back the fastest. This is what I’ve noticed over countless market dips.