Reasons Remain for Fed to Keep Easy-Money Policies Fueling Equities

Paul Dykewicz

Plenty of compelling reasons exist for the Federal Open Market Committee to maintain its easy-money policies that have kept the stock market rising.

Concerns that the policies aimed at keeping interest rates about as low as they can go are understandable but easy-money proponents at the Fed can cite a number of recent economic reports and corporate earnings shortfalls to confirm that the U.S. economy remains weak. However, investors are wise to recognize that the Fed ultimately will reverse course when inflation returns and unemployment rates fall below the current politically hazardous level of 7.5 percent.

First, the price of gold, which is a traditional hedge against inflation, fell today for the seventh consecutive trading session and its longest slump in four years. If inflation was a true risk, gold would be rising rather than falling. Fed officials can use the sliding gold prices as a key reason to keep interest rates low.

Second, Wal-Mart is among a number of corporations that recently reported weaker-than-expected sales. Wal-Mart’s management expressed concern that its budget-conscious shoppers are scaling back their spending, and executives cited the company’s fading financial results as proof that prices need to be kept low to cater to customers.

Third, construction of new homes in the United States fell 16.5 percent in April to a seasonally adjusted annual rate of 853,000 units, marking the lowest level since last November. Builders acknowledged delaying the release of new houses or boosting new home prices. Both factors contribute toward putting home ownership further out of the reach of prospective buyers.

Exclusive  Stocks Rise ahead of Federal Reserve Meeting

Fourth, consumer prices fell 0.4 percent in April for a second straight month of decline, the Labor Department reported yesterday. That slippage brings down the average annual increase in the Consumer Price Index to 1.7 percent, when excluding food and energy, falling below the 2 percent mark that Fed officials favor for a healthy economy.

Fifth, Europe’s economy seems to be sliding rather than recovering. Indeed, the euro-zone economy shriveled further during the first quarter of 2013 to mark an unprecedented sixth successive quarterly economic fall in the region. France, one of Europe’s biggest economies, slipped into recession, and Germany, Europe’s largest economy, barely grew, according to first-quarter data released Wednesday by Eurostat, the European Union’s statistical agency.

Sixth, a reversal of the Fed’s current easy-money policy to stimulate growth would be contrary to its public mission of maximizing full employment, as well as maintaining stable prices and moderate long-term interest rates. With unemployment around 7.5% and many workers taking part-time positions rather than full-time jobs that they would prefer, the Fed is far from achieving its goal of restoring full employment.

The only people who seem to be encouraged about the economy right now are members of the general public. Consumer sentiment is climbing, and investors still are bidding up the price of equities in search of heightened returns that the interest paid on savings accounts cannot match. Many of those people may be the ones who have taken on too much debt in the past, and Fed officials need to look beyond the scope of financially unsophisticated laymen in carrying out its mission.

Exclusive  Buffett Disciple’s Automaker Bet Continues to Surge

Unless much more positive indicators about the U.S. economy arise in the coming weeks and months, any change in the Fed’s easy-money policy as soon as this summer seems slim.

Paul Dykewicz is a seasoned journalist who is the editorial director of the Financial Publications Group at Eagle Publishing and the editor of the Eagle Daily Investor website. He also edits five monthly investment newsletters, Forecasts & Strategies, Successful Investing, High Monthly Income, Alpha Investor Letter and PowerTrend Profits, as well as a number of time-sensitive trading services.

Like This Article?
Now Get a FREE Special Report:
3 Dividend Plays with Sky-High Returns

This newly-released report by a top-20 living economist details three investments that are your best bets for income and appreciation for the rest of the year and beyond.

Get Access to the Report, 100% FREE


img
previous article

The aggressive monetary policy of Japanese Prime Minister Shinzo Abe and the Bank of Japan (BoJ) has caused the island-nation’s currency to pass the 100 yen-to-the-dollar level and lift the price of Japanese equities. The question on the minds of many investors is: How much longer can Japan’s rally last?

PREMIUM SERVICES FOR INVESTORS

Dr. Mark Skousen

Named one of the "Top 20 Living Economists," Dr. Skousen is a professional economist, investment expert, university professor, and author of more than 25 books.

Product Details

LEARN MORE HERE

Bryan Perry

A former Wall Street financial advisor with three decades' experience, Bryan Perry focuses his efforts on high-yield income investing and quick-hitting options plays.

Product Details

LEARN MORE HERE

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker,
financial journalist, and money manager. As well as a book author and regular contributor to
numerous investment websites, Jim is the editor of:

Product Details

LEARN MORE HERE

Bob Carlson

Bob Carlson provides independent, objective research covering all the financial issues of retirement and retirement planning. In addition, Bob serves as Chairman of the Board of Trustees of the Fairfax County (VA) Employees’ Retirement System, which has over $2.8 billion in assets.

Product Details

LEARN MORE HERE

Mike Turner

Mike Turner’s financial, mathematical, computer science and engineering background serves as the foundation for his disciplined, rules-based approach to trading. Mike’s three services include:

Product Details

LEARN MORE HERE

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street. Since 2010, Hilary's financial publications have provided stock analysis and investment advice to her subscribers:

Product Details

LEARN MORE HERE

DividendInvestor.com

Used by financial advisors and individual investors all over the world, DividendInvestor.com is the premier provider and one-stop shop for dividend information and research.

Product Details

Popular tools include our proprietary Dividend Calendar, Dividend Calculator, Dividend Score Card, and many more.

LEARN MORE HERE