Ben Bernanke Opens His Checkbook

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Fed Chairman Ben Bernanke will not appear on any world’s wealthiest lists. He does have an awful lot of money at his disposal however. When you combine his actions today with the work of the ECB, we see, once again, it does not pay to "fight the Fed."

Big Ben announced an aggressive mortgage bond buying program today, saying “in order to support a stronger economic recovery and to help ensure that inflation, over time, is at the most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.” They did not give a time frame for how long this program will last, which means it is open-ended. They also extended their outlook for low rates until 2015 and promised additional support by saying,

If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability and the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.

So, in the last week the world’s two most influential central banks have announced open-ended direct asset purchase campaigns. Those that have been following the lead of the central bankers have done well. The "yeah but" crowd has been on the sidelines missing out on the rally. The actions by the Fed may very well end in disaster. I do not have a crystal ball. But, I have been told from day one “don’t fight the Fed.” That remains true. I darn sure shouldn’t fight the feds of the world as they are working in a coordinated manner. As for how this will conclude down the road? I do not know, but the market will give us some clues before things sell off it always does.

Commodities rallied sharply following the Fed’s mid-day announcement. Gold, silver, copper, platinum and palladium all rallied. 

Financial stocks rallied again today. Bank of America led all major banks rising 4.8%. Wells Fargo, Citigroup, J. P. Morgan and American Express all had sharp advances also. 

Homebuilders and building products stocks were up close to 4% today. Clearly the Fed announcement to purchase $40 billion worth of mortgage backed securities a month had a significant impact on the industry group. 

The consumer sector reacted favorably to the announcement. An improving real estate market eventually leads to higher consumer spending. Retailers associated with housing, home improvement, furniture etc. all did exceptionally well.

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About Thomas J Smith CFA