The Fed Takes Action: Is Super-Inflation on the Horizon?
As you probably heard, earlier this month the Federal Reserve announced an aggressive plan to stimulate the economy after previous efforts have proved insufficient. The Chicago Sun-Times reports:
The Fed said it would buy $40 billion of mortgage securities a month until the economy improves. It left open the possibilities of buying other assets and of buying long after the recovery picks up.
The central bank also extended its pledge of super-low short-term interest rates into 2015, and extended a program to drive down long-term rates.
It was the package known as QE3 — a third round of quantitative easing, in market-speak. And it was just what investors were hoping for.
“They’re saying that the punch bowl, the fuel for the economy, isn’t going away — it’s going to be here as long as you need it,” said Tony Fratto, a former aide to President George W. Bush and managing partner at Hamilton Place Strategies, a policy consulting firm in Washington.
In other words, the Federal Reserve is going to inject $40 billion per month in cash into the economy for the foreseeable future, by purchasing securities and other assets that aren’t currently in high demand. As a result, banks and other institutions are expected to loan more, spend more, and ultimately stimulate growth in the economy
This sounds like great news, doesn’t it? Wall Street certainly approves of the plan—stock prices immediately shot up following the announcement.
But have you ever considered where exactly this money is coming from? The Federal Reserve isn’t “creating wealth”, they are simply increasing the money supply. And while that may have positive short term results, it’s also the textbook answer to the question “what causes inflation?”
So what’s the bottom line? This action by the Fed may well help to jumpstart our economic recovery. But these policies also dramatically increase the chances of significant inflation impacting the economy in the near future. As an investor, inflation represents a lethal attack on your future—and you can’t afford to ignore it. It’s important that you take steps to protect yourself from these forces. We can help—contact us today to learn more!
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Depaul University—O’Hare Campus in Chicago IL
July 31, 2012 7:00 PM