Why the Fed’s New Plans Won’t Change a Thing This Year

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In an interview on CNBC, John Boehner, Speaker of the United States House of Representatives, accused Federal Reserve chairman Ben Bernanke of generating the market sell-off. 

In fact, Mr. Boehner actually should’ve thanked Bernanke for the stock market rally that drove the Dow and S&P 500 to record highs. It was only because of the Federal Reserve’s easy monetary policy that stocks were able to climb so rapidly despite a somewhat sluggish economy. 

And there’s still no definite date to cut the bond stimulus; in order for the stimulus to end, the economy will need to drive higher in its recovery and the unemployment rate will need to fall to seven percent. 

It’s not a sure bet that the Federal Reserve’s plan will ever come to fruition. There’s also an assumption by the Federal Reserve that the U.S. economy will ratchet higher. 

The eurozone continues to be gripped in a recession, as indicated by the most recent Purchasing Managers’ Index (PMI) readings, which showed contraction. And then you have Big Red China, which is continuing to show dangerous signs of slowing—factory orders are declining, and unless the country can get its consumers to spend (part of its 10-year plan), China could see its economy falter even more. 

My point is that the horizon is not clear for the U.S. economy. If China and the eurozone struggle, it’s likely that the demand for American goods will be affected, which will drive gross domestic product (GDP) growth down and result in stagnant job creation. 

Under that scenario, the Federal Reserve may be forced to hold back on cutting all of its bond buying. 

But one thing is clear, the era of the Federal Reserve’s low interest rates will likely continue into 2014 and beyond; and will keep going unless the U.S. economy undergoes a massive and altogether unlikely recovery. 

The reality is that the low interest rates will continue to allow the flow of easy money into the economy—that has not changed. Yes, there will be some pressure with the higher yields in the mortgage market and bonds, but overall financing rates will continue to be near historical lows. 

For Mr. Boehner, he can rest assured the party on Wall Street has not come to an end. 

The easy gains may have been made, but there will still be numerous opportunities to pump up your 401(k). Mr. Boehner should go and thank Bernanke for the stock market riches.

by George Leong, B.Comm. 

This article Why the Fed’s New Plans Won’t Change a Thing This Year was originally published at Investment Contrarians

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