On news that the Fed stimulus program continues unchanged the bond market rallied. Yields fell and bond prices rose. Buyers outnumbered sellers as the bond market experienced its biggest one day jump in nearly two years. The Fed stimulus program continues unabated when virtually no one thought that it would. The central bank published minutes of its last meeting at which it decided to continue its $85 Billion a month purchase of mortgage securities and treasuries. This policy is widely credited with helping the US economy climb out of the recession and lift the stock market on a months-long rally. Ben Bernanke, the soon to leave Fed Chairman, gave a press conference just after the info was announced and stated that the economy is not quite to the point where the Fed will choose to start tapering off on its stimulus program. The interpretation of bond traders is that the economy is not likely to pick up enough steam soon enough to prompt the Fed to pull the trigger on a stimulus cutback. The end-of-day ten year note rate was just under 2.7% as opposed to around 1.6% in May of 2013 when the market first anticipated a drawback in the quantitative easing stimulus program.
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Watching the Fundamentals
It appears that the Federal Reserve is doing when we continually advise investors to do, fundamental analysis. Putting political concerns aside it appears that the Fed is going to continue its program of pumping money into the bond market until unemployment improves more and the economy moves further out of recession. On a fundamental analysis note, investors owning dividend stocks will likely see the value of their investments rise as bond yields fall and bond values rise. The current front runner to replace Mr. Bernanke at the Fed is Janet Yellen, the Fed vice chairman. Ms. Yellen was instrumental in developing the stimulus policy of quantitative easing. Many experts believe that she will likely follow the conservative course of Mr. Bernanke in not starting too soon or going too fast. As the Fed stimulus program continues traders will wisely watch the economic fundamentals for clues as to when the pullback will occur. Those who follow market sentiment instead will likely be caught off guard as were many who found themselves in short positions and lost money when the Fed acted rationally.
When Will It End and to What Effect?
The Fed stimulus program continues because the US economy is still not totally mended from the damage of the 2008 market crash and ensuing recession. And, one of the dangers to the US economy is the huge amount of US debt. On one hand running up more and more does not seem like a good idea. On the other hand driving interest rates down has the effect of lessening the interest burden of the US debt. To the extent that the same policy drives down the value of the US dollar it further reduces the value of US debt held offshore in countries like Japan, Taiwan, and China. These nations and others have routinely manipulated their currencies to keep them weak in relation to the US dollar. This has helped their imports and given them huge currency reserves, primarily in US dollars. To the extent that the Fed stimulus program continues it may serve to reduce the value of offshore debt to the betterment of the US economy.