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The Quantitative Easing Is(n’t) Working (The Motley Fool)

We have all read hot news written by talented authors. The news about The Quantitative Easing Is(n’t) Working
(The Motley Fool)
was a long time a coming. But The Quantitative Easing Is(n’t) Working
(The Motley Fool) doesn’t stop here. The author shows two wonderful talents. Read the the whole sections to see what I mean. By: US Economy

It’s been more than a month since the Federal Reserve released details of its latest quantitative easing. That isn’t enough time for statistics and surveys to show how the plan is working, but there are indicators showing how markets have responded.

The New York Fed statement detailing the plan leads off with:

On November 3, 2010, the Federal Open Market Committee (FOMC) decided to expand the Federal Reserve’s holdings of securities in the System Open Market Account (SOMA) to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.

In other words, the goals are to increase inflation and goose the recovery, which implies keeping interest rates low. A basket of exchange-traded funds should give a good snapshot of how things are going.

PowerShares DB US Dollar Index Bullish (NYSE: UUPNews) tracks the performance of the dollar against a basket of currencies. SPDR Gold Shares (NYSE: GLDNews) follows the price of gold and PowerShares DB Agriculture (NYSE: DBANews) is keyed to a basket of agricultural commodities. If the market is expecting higher inflation in the U.S., investors should expect to see lower prices for the dollar index and higher prices for gold and commodities.

iShares Barclays 20+ Year Treasury (NYSE: TLTNews) follows long-term Treasury bond prices. iShares Barclays Aggregate Bond (NYSE: AGGNews) and Vanguard’s Total Bond Market (NYSE: BNDNews) track baskets of bonds intended to reflect the entire bond market.

The table shows prices just after the plan details were released and for Friday’s close.

Results are mixed. Gold and agricultural commodity prices have increased, scoring two for inflation expectations. But the dollar has strengthened. More than half the dollar bull fund is measured against the euro, so its performance is from weakness in the eurozone and dollar strength.

The bond indicators aren’t showing as much success. All three funds decreased in price, meaning interest rates increased, after the Fed spilled the beans on its plan. My Foolish colleague Morgan Housel covered 10-year Treasury yields and also found it’s getting more expensive to borrow money.

At least in the short term, the Fed is succeeding on its goal to make stuff more expensive. Based on interest rates, goosing the economy isn’t looking so good.

The old market adage of “don’t fight the Fed” is tough to apply when the Fed is fighting itself. Buying Treasuries adds upward price pressure, but higher inflation expectations counter that with upward interest rate pressure. As long as QE is in play, some inflation protection makes sense. Whenever the price support from QE ends, holding long-term bonds will not be a pleasant experience.

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This news, The Quantitative Easing Is(n’t) Working
(The Motley Fool)
extract from US Economy

Short URL: http://www.usnews9.com/?p=4015

Posted by on Dec 17 2010. Filed under Business. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry
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