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The Fed’s True Goal: Revive the 'Wealth Effect'

By David Skarica   |   Thursday, 04 Nov 2010 09:54 AM

Many are talking about QE2 and the bond purchases. Most seem to relate it to the economy: that the Fed is doing it to support the economy. However, how?

I think that very little is being made of the Fed wanting to put a buffer under the stock market.

In the 1990s, one of the reasons behind the economic boom was the "wealth effect," where consumers felt richer when stock prices went higher. This led to increased consumer spending.

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In addition, with entitlement programs underfunded by trillions of dollars, the Fed is trying to essentially prop up the stock market, which will in turn help pension funds.

Therefore, a major reason for QE2 is to increase stock prices, which the Fed hopes will again feed a wealth effect and decrease the problems of underfunded pension plans.

The problem is that in the 1990s, unemployment was near 5 percent. It is now hovering around 10 percent.

People are selling stocks or are out of the market. You have to own stocks for an increasing stock market to have an effect. Therefore, I think this strategy is flawed.

However flawed, I think a major reason behind QE2 is to increase the prices of equities.

About the Author: David Skarica
David Skarica is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes the Gold Stock Adviser. Discover more by Clicking Here Now.

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Many are talking about QE2 and the bond purchases. Most seem to relate it to the economy: that the Fed is doing it to support the economy. However, how? I think that very little is being made of the Fed wanting to put a buffer under the stock market. In the 1990s, one...
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2010-54-04
 

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