Market Beat: Quantitative easing explained |

Market Beat: Quantitative easing explained

Quantitative easing is a tool that the Federal Reserve uses to stimulate the economy. The way it works is pretty simple andamp;#8212; the fed goes out and buys outstanding public debt and retires it. So far the fed has had two rounds of quantitative easing, known as QE1 and QE2. The numbers are huge andamp;#8212; QE1 was $1.375 trillion and QE2 was for $600 billion. The fed will buy from a wide group of institutions who have large holdings. They can be banks, pension funds, insurance companies, etc.Investors should be aware of what the effects of QE are on the stock market. If the fed announces another round of QE, that will be bullish for the stock market and other types of assets like gold, silver, etc. The reason the stock market goes up with the QE efforts is the institutions the fed buys the bonds from need to have somewhere to reinvest the funds they receive, and quite a bit of that money ends up getting invested in the stock market. If there is going to be another round of QE, it will be due to a softening of the economic data. Recently some of the numbers have been down somewhat, but we havenandamp;#8217;t seen anything dramatic enough yet for the fed to act. The weekly jobless claims have been climbing a little and the first quarter GDP report released last week was lower than expected at an annualized growth rate of 2.2 percent.Ben Bernanke, the chairman of the Federal Reserve, has hinted that another round of QE could be on the table. Last week he said, andamp;#8220;We remain prepared to do more as needed to make sure that this recovery continues.andamp;#8221; He also said that another round of bond purchases could be on the table.Investors should keep an eye on the economic data as it is released. If the data keeps getting worse, the stock market will react by selling off with increased volatility and if the fed announces another round of QE, the stock market will rally and the market volatility will decrease. Bill Gross, manager of the largest bond mutual fund in the world, has said that, andamp;#8220;Central banks are where bad bonds go to die. Without QE, the financial markets and then the economy will falter.andamp;#8221;andamp;#8212; Kenneth Roberts is a Truckee based Registered Investment Advisor. Information on his money management service can be found at andamp;#8212; or by calling 775-657-8065. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.

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