Helping Fed

As anticipated, the Fed’s minutes yesterday showed that the members of the FMOC are concerned about continued high unemployment and whether deflation will swamp the economy.

It was not apparent as to when the Fed would act by injecting more cash into the economy via the purchase of Treasury securities. No specifics as to the amount of money intended to be used were mentioned.

This entire act of Quantitative Easing (QE-2) represents an untried and unproven method based on nothing but theoretical economic models to get the economy moving forward by avoiding a return into recessionary territory at all costs. It’s questionable in my mind whether it will have any positive effect at all, and it remains to be seen what the backlash will be.

Obviously, the stock and bond markets have been enamored by the fact that help is on the way; and in the end they may very well be the only beneficiaries of this effort. In fact, as I am writing this in Germany, it’s 2:20 am PST, and the European markets have reacted favorably to the Fed’s minutes and are up over 1%. The futures indicate a stronger opening in the U.S. markets as well.

While QE-2 may have a short-term positive effect on your portfolio, I question whether it can solve any of the pressing concerns along the lines of high unemployment, a depressed real estate market or any of the other issues that ail us.

This may very well be the last bulled the Fed has in its economic gun; if it fails to get the intended results, there is bound to be a reaction in the stock market, and it won’t be a pleasant one.

Therefore, I maintain my view that it is better to participate in this rally in a conservative way, than to go all out and suffer the consequences when the inevitable directional turn takes place.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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