Citywire for Financial Professionals
Stay connected:

View the article online at http://citywire.co.uk/money/article/a446788

Federal Reserve to pump $600 billion into US economy

The Federal Reserve has announced a further $600 billion (£373 billion) of asset purchases in a bid to prop up the US economy.

 
Federal Reserve to pump $600 billion into US economy

The Federal Reserve has announced a further $600 billion (£373 billion) of asset purchases in a bid to prop up the US economy.

The bank's rate-setting committee, the Federal Reserve Open Markets Committee (FOMC), voted by a margin of 10-1 for the programme. The overall figure is slightly higher than the $500 billion the market had anticipated. However the pace of purchases, at a rate of $75 billion a month, is slightly slower. The whole programme will be completed by the end of the first half of 2011. As the Fed is already re-investing its first round of QE it will effectively be in the market for more than $100 billion of Treasuries each month.

The chief investment officer of Blackrock Merrill Lynch, Bob Dole said: 'The Fed said today that 'we want more growth and more inflation.' Put the two together that's revenues, stocks benefit from these actions.'

The Dow Jones Industrial Average rallied on the news briefly but within five minutes was trading down some 29 points at 11,204. Other assets reacted more dramatically to the news. The price of gold jumped $10 to $1,346 as investors searched for protection from inflation. The dollar slipped against the Euro to stand at €1 to $1.4175.

The Fed is to focus on buying Treasury bonds of a duration of between five and ten years. However, even these bonds saw yields rise on the announcement on profit taking as investors begun to conclude the purchases are now in the price. Ten year yields jumped 3.5 basis points to stand at 2.345%

Bill Gross, chief investment officer of Pimco, said that investors should not view this as a reason to buy Treasury bonds: 'Those that should have bought Treasuries should have bought them already and we will be looking forward to handing them off as we accelerate toward [the eventual end of the programme].'

Capital Economics senior US economist Paul Ashworth backed up this view. 'According to estimates from the NY Fed, these purchases should knock between 50 basis points and 75 basis points off Treasury yields. Someone should have told bond investors, who are currently driving Treasury yields higher on the back of the Fed's announcement.

'Admittedly, this announcement had been largely priced in for several weeks now so there was little prospect of any big market reaction. Nevertheless, those estimates of the impact on long-term interest rates were based on the first episode of QE that was conducted in the midst of the financial crisis in 2009. We suspect the impact on yields now will be much smaller and today's market reaction only reinforces that view.'

This follows $1.2 trillion purchases of assets last year.

In its statement the FOMC acknowledged worsening economic data but said the inflationary outlook remains stable. It said: 'Information received since the FOMC met in September confirms that the pace of recovery in output and employment continues to be slow.

'Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls.

'Housing starts continue to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters.'

Sign in / register to view full article on one page

7 comments so far. Why not have your say?

KevB

Nov 03, 2010 at 20:02

"The dollar jumped $10 to $1,346"

I think that should be Gold!

report this

Peter Jason Taylor

Nov 03, 2010 at 22:54

No, KevB, gold didn't jump: it fell from $1,358 per ounce at Tuesday's New York close, to $1,346 on Wednesday afternoon. Or to put it another way, the dollar jumped from 0.0007364 ounces of gold to 0.0007429 ounces.

I think people who had bought gold on the rumour of QE2 have sold on the fact: often said to be good advice. But the dip won't last long, nor will the $600,000,000,000; it's a good time to buy gold before Helicopter Ben starts thinking about QE3.

report this

Chris Powell

Nov 04, 2010 at 08:49

3 years ago stock markets fell because of the economic outlook yet oil prices kept rising. The reason oil kept making record highs was due to speculation and graphs showing an upward trend. Oil crashed.

Now we have bonds on a high because of deflation and gold on a high for inflation! Either we will get deflation (gold will crash) or inflation (bonds will crash) or neither. If we get neither both of these assets will crash.

Following graphs, trends and speculation is right up until the crash!

report this

Peter Jason Taylor

Nov 04, 2010 at 10:50

It's a popular myth that inflation is good for gold but bad for bonds, and vice versa for deflation.

But the deflation that occurred between 1929 and 1935 was good for the gold price (or its proxy "Homestake Mining Company", because the dollar price of gold was fixed). By 1935 its share price has risen by 525%, whilst the Dow Jones was still little above its 1932 low. Long-term US Treasury Bond prices varied very little, for example 3.5% 1947 rose from $100 in 1929 to less than $104 in 1933.

Conversely the period 1980 to 2001, which included periods of high inflation and interest rates, and definitely no deflation, was good for bonds but very poor for gold.

The reason deflation is good for gold is that central banks, and the US Fed in particular, are scared to death of it, and are determined on this occasion to use all means, conventional and unconventional, to avoid or defeat deflation. This includes money-printing in its various forms. That is why gold prices are rising, and bonds are in a bubble, in my humble opinion. Of course I might be wrong!

report this

Chris Powell

Nov 04, 2010 at 11:34

Between 1980- 2001 we did not have extremely high inflation. That is why gold did not go up. Today because we have had a deflation period and US is pumping money into the economy people think we will get extreme hyper inflation and so that is one reason gold is in demand. However, after 1935 when we did not get extreme high inflation gold had a terrible performance. Gold goes up on extreme situations I agree that it goes up in a deflation period because of the expectation of hyper inflation. I will correct my statement to:

Now we have bonds on a high because of an HIGH EXPECTATION of deflation and gold on a high for HIGH EXPECTATION of HYPER inflation! Either we will get deflation (gold will crash) or EXTREME inflation (bonds will crash) or neither. If we get neither both of these assets will crash!

Gold is the investment of last resort and if the economy does not crash the gold will!

report this

Peter Jason Taylor

Nov 04, 2010 at 14:42

Chris, I didn't say we had "extremely high inflation" from 1980 to 2001. But it was persistent, and reached 11% in 1990, requiring double-figure interest rates and a recession to control it. The RPI, based on January 1987 = 100, rose from 70.3 in January 1981 to 171.1 in January 2001, an increase of 143% in 20 years. During those 20 years the gold price in dollars fell by 50%, and in sterling by almost 50% from about £300 to £157 per ounce.

I agree that gold and bond prices depend on inflationary expectations. My expectation is that inflationary forces will eventually win, because the Fed will move heaven and earth to avoid replicating the Japanese experience. We shall probably get "stagflation" instead, because, despite the perceived threat of deflation, we are experiencing high commodity prices.

Long bond investors are fools because they are relying on "greater fools" to relieve them of their bonds at even higher prices before inflation takes hold.

report this

snoekie

Nov 04, 2010 at 21:32

I think a big, big mistake. Adulterating the currency and basic imports will rise, as will foodstuffs as the yanks will find out. For example, adluterate the milf and for the same in your/tea/coffe you will need more to get the same effect, but it will because of the adultery dilute your tea/coffee.

Inflation was alwaus something to be resisted, and that is why there are always increased pay demands, because of inflation.

Okay it takes a while to work through, but work through it will.

Long past the time that the Yanks trimmed their sails, cut their cloth for a lesser suit, or make their suit according to the cloth they have.

Because of their previous exports, and their raw material requirements, many of their markets have become sophisticated enough to sell to the US, so that it is now a net importer, and their wealth is hemorrhaging abroad., ergo the dollart will buy less, and even less after the QE.

report this

leave a comment

Please sign in here or register here to comment. It is free to register and only takes a minute or two.

News sponsored by:

The Citywire Guide to Investment Trusts


In this guide to investment trusts, produced in association with Aberdeen Asset Management, we spoke to many of the leading experts in the field to find out more.

Watch Now

More about this:

What others are saying

Archive

Today's articles

Tools from Citywire Money

From the Forums

+ Start a new discussion

Weekly email from The Lolly

Get simple, easy ways to make more from your money. Just enter your email address below

An error occured while subscribing your email. Please try again later.

Thank you for registering for your weekly newsletter from The Lolly.

Keep an eye out for us in your inbox, and please add noreply@emails.citywire.co.uk to your safe senders list so we don't get junked.

Sorry, this link is not
quite ready yet