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Look for Sharp Pullback if the Fed Disappoints

Tuesday, 02 Nov 2010 12:22 PM

The Federal Reserve’s long-awaited decision regarding its future monetary policy plans is finally due to be released tomorrow afternoon at around 2:15 pm Eastern Time.

According to a survey of economists that was conducted last week by Bloomberg News, the majority of economists who responded to that survey said that they expect the Fed to announce that it will purchase $500 billion of U.S. government securities during the months ahead in an effort to stimulate the U.S. economy.

In comparison, the Fed purchased approximately $1.7 trillion of U.S. government and government agency securities during the 12 months ended March 2010. Hence, the economists surveyed by Bloomberg expect, on average, for the Fed to purchase a substantially smaller amount of government securities during the coming months than it did during its first round of so-called quantitative easing.

How to Make Money Off Barack Obama’s $819 Billion “Stimulus Plan”

Although some stock-market participants apparently think that any such purchases of government securities would serve to stimulate borrowing and spending, there is no evidence to support that thinking. Quite the contrary, a review of bank loans during the past couple of years shows that American households and businesses took out fewer loans during the past 12 months than they did during the prior 12 months even though the amount of loanable bank funds that the Fed created by its mass purchases of U.S. government securities from March 2009 to March of this year rose by almost 30 percent during that period.

In light of the fact that approximately 17 percent of Americans that either want or need a job are unable to secure a full-time job and that approximately 25 percent of mortgage debtors owe more money on their mortgage than the value of the home in which they live is worth, there’s no reason to think that more Fed purchases of U.S. government securities will encourage Americans to take out more loans – even if inflation-adjusted borrowing rates fall another percentage point.

Worse yet, for stock-market investors, stock prices might pull back substantially on Wednesday if the Fed indicates that it might purchase a smaller amount of government securities than most economists expect.

Note from Moneynews:

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About the Author: David Frazier
David Frazier is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes two very successful investment newsletters. Discover more by Clicking Here Now.

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The Federal Reserve s long-awaited decision regarding its future monetary policy plans is finally due to be released tomorrow afternoon at around 2:15 pm Eastern Time. According to a survey of economists that was conducted last week by Bloomberg News, the majority of...
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2010-22-02
 

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