Today was the monthly Federal Open Market Committee Meeting.
At this meeting, the Federal Reserve decided to not begin tapering off the aggressive Quantitive Easing program until the economy showed more evidence of strong growth. This was expected of the Feds, as Chairman Ben Bernanke repeatedly stated that he would not begin the tapering until the economy recovered, and there is no set schedule for the tapering. Gold, stocks, and bonds are surging, while the dollar is plummeting. The Committee nearly unanimously decided to keep interest rates between 0% and 1/4% until the unemployment rate dropped to 6.5%.
To recap what was discussed in depth in previous articles, the Federal Reserve adopted an aggressive Quantitive Easing program a couple years ago in order to help jump start the economy after the depression. The Quantitive Easing program called for the Feds to buy $85 billion in US Treasuries and Bonds per month, in order to keep interest rates low. The low interest rates would encourage businesses and consumers to borrow more money in order to spend money and hire/pay workers, thereby pumping money in to the economy. The QE program has worked very well, unemployment dropped from a high of 10% in 2010 to it's current 7.3% level, and consumer and business spending and PMI are at all time highs. For most of 2012, and the first half of 2013, the economy has been improving steadily, at times even beating bullish analysts' estimates. This was a good sign and proof that the QE program should begin to be tapered off, which is what the Federal Reserve foreshadowed in the first half of 2013. Investors on the other hand were split. Some investors (doves) believed that if the Fed's tapered off the QE program, interest rates would rise and damage the still weak economy. The doves also believed that the interest rates should remain low until the unemployment rate lowered even more. Other investors (hawks) believed that the QE program should be ended almost immediately, because the low interest rates were causing an increase in inflation rates. The low interest rates caused many people to want to borrow money (it's cheap), so there was an increase in the demand for money, while the supply of money stayed constant. Simple supply and demand illustrates that the prices will rise if the supply stays constant and the demand grows; which is what hawkish investors did not want to happen.
The Federal Reserve Chairman and Vice Chair(wo)man, Ben Bernanke and Janet Yellen, are more dovish then hawkish, which explains their decision to not taper off the Federal Reserve's aggressive QE program just yet. July and August's unemployment numbers do show a decrease in unemployment, however that decrease is still below analysts'/economists' estimates, and the lower unemployment rate has been attributed to a decline in the number of people looking for jobs, not an increase in the number of jobs/hires. As a result of the FOMC's decision to not taper off the QE until the economy (primarily the unemployment rate) improved, stocks, bonds, and gold surged while the dollar's value plummeted.
The stock market surged because low interest rates meant that consumers could (borrow more money to) spend more money, increasing the cash flow and income of companies. Stock prices increase if the company earns more income/revenue then the previous quarter, because it shows the company has grown and an increased in value. So, stocks in general surged because the low interest rates meant greater cash flow/income for companies, which makes them look more profitable to investors, who in turn buy the stock (increase demand), causing an increase in price of that stock.
Bond yields increase because bonds are financial tools of debt, and because of low interest rates, companies can borrow more money at cheaper/lower rates to pay off its debt. Because the money is so cheap to borrow, the company will increase its bond yield in order to attract investors into buying that company's bond over another company's bond.
Gold prices surged because gold and commodities in general are used as hedges against inflation. When inflation increases, money has less purchasing power (you can buy less goods with the same amount of money). Commodity prices increase because the price of raw materials to make goods increases, making the commodity increase in price. Commodities now become more attractive then stocks and bonds as an investment tool, because the rate of return is higher. Today, gold prices surged because the Feds decided to keep buying $85 billion in bonds and Treasuries every month in order to keep interest rates low, which would cause an increase in inflation.
The dollar's value plummeted because of fears of an increase in inflation. Low interest rates meant there would be more demand of money then supply of money, so prices would rise (inflation). If there was inflation, the same amount of money today would not buy the same amount of product tomorrow.
At this meeting, the Federal Reserve decided to not begin tapering off the aggressive Quantitive Easing program until the economy showed more evidence of strong growth. This was expected of the Feds, as Chairman Ben Bernanke repeatedly stated that he would not begin the tapering until the economy recovered, and there is no set schedule for the tapering. Gold, stocks, and bonds are surging, while the dollar is plummeting. The Committee nearly unanimously decided to keep interest rates between 0% and 1/4% until the unemployment rate dropped to 6.5%.
To recap what was discussed in depth in previous articles, the Federal Reserve adopted an aggressive Quantitive Easing program a couple years ago in order to help jump start the economy after the depression. The Quantitive Easing program called for the Feds to buy $85 billion in US Treasuries and Bonds per month, in order to keep interest rates low. The low interest rates would encourage businesses and consumers to borrow more money in order to spend money and hire/pay workers, thereby pumping money in to the economy. The QE program has worked very well, unemployment dropped from a high of 10% in 2010 to it's current 7.3% level, and consumer and business spending and PMI are at all time highs. For most of 2012, and the first half of 2013, the economy has been improving steadily, at times even beating bullish analysts' estimates. This was a good sign and proof that the QE program should begin to be tapered off, which is what the Federal Reserve foreshadowed in the first half of 2013. Investors on the other hand were split. Some investors (doves) believed that if the Fed's tapered off the QE program, interest rates would rise and damage the still weak economy. The doves also believed that the interest rates should remain low until the unemployment rate lowered even more. Other investors (hawks) believed that the QE program should be ended almost immediately, because the low interest rates were causing an increase in inflation rates. The low interest rates caused many people to want to borrow money (it's cheap), so there was an increase in the demand for money, while the supply of money stayed constant. Simple supply and demand illustrates that the prices will rise if the supply stays constant and the demand grows; which is what hawkish investors did not want to happen.
The Federal Reserve Chairman and Vice Chair(wo)man, Ben Bernanke and Janet Yellen, are more dovish then hawkish, which explains their decision to not taper off the Federal Reserve's aggressive QE program just yet. July and August's unemployment numbers do show a decrease in unemployment, however that decrease is still below analysts'/economists' estimates, and the lower unemployment rate has been attributed to a decline in the number of people looking for jobs, not an increase in the number of jobs/hires. As a result of the FOMC's decision to not taper off the QE until the economy (primarily the unemployment rate) improved, stocks, bonds, and gold surged while the dollar's value plummeted.
The stock market surged because low interest rates meant that consumers could (borrow more money to) spend more money, increasing the cash flow and income of companies. Stock prices increase if the company earns more income/revenue then the previous quarter, because it shows the company has grown and an increased in value. So, stocks in general surged because the low interest rates meant greater cash flow/income for companies, which makes them look more profitable to investors, who in turn buy the stock (increase demand), causing an increase in price of that stock.
Bond yields increase because bonds are financial tools of debt, and because of low interest rates, companies can borrow more money at cheaper/lower rates to pay off its debt. Because the money is so cheap to borrow, the company will increase its bond yield in order to attract investors into buying that company's bond over another company's bond.
Gold prices surged because gold and commodities in general are used as hedges against inflation. When inflation increases, money has less purchasing power (you can buy less goods with the same amount of money). Commodity prices increase because the price of raw materials to make goods increases, making the commodity increase in price. Commodities now become more attractive then stocks and bonds as an investment tool, because the rate of return is higher. Today, gold prices surged because the Feds decided to keep buying $85 billion in bonds and Treasuries every month in order to keep interest rates low, which would cause an increase in inflation.
The dollar's value plummeted because of fears of an increase in inflation. Low interest rates meant there would be more demand of money then supply of money, so prices would rise (inflation). If there was inflation, the same amount of money today would not buy the same amount of product tomorrow.
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