On Thursday the minutes were released from the Federal reserve meeting, which showed division among members on when to end the 85 billion per month bond buying program that is being used to suppress interest rates in the U.S. The minutes indicated that a “few” were hoping to end the bond purchasing program by the end of 2013, and “several” would like to see it end even sooner than the end of the year. The Fed has never announced an end date for the program but has always said it will continue as long as the labor market has not improved “substantially”.
Markets Respond To The Federal Reserve’s Indecisiveness On Economic Stimulus Program
The stock market dropped off after the division among members was noted in the Fed minutes. Bond buying and economic stimulus has been giving the stock market a boost for some time now. However, according to Stuart Hoffman, the chief Economist at PNC Financial, it is premature to start becoming concerned about the bond buying program and the impact it would have on the economy when that program ends. He states: “The very low mortgage rates will stick around for a while, certificate of deposit rates will also stay very low, for this year and probably for several more.”
How Long Can We Expect The Fed To Continue Economic Stimulus?
Although the Fed has not given an end date to it’s massive bond buying program, they originally announced that they would keep the stimulus in place as long as unemployment was higher than 6.5% and inflation remained stable at 2.5%. Although ADP recently reported that 215,000 new jobs were added in December, which is more than the 140,000 forecasted for the month, it is unlikely that unemployment will drop below 7.6% by the end of 2013.
How Will Economic Stimulus Impact Inflation?
Even though the markets and investors are very concerned about the here and now, and how the stimulus is helping their investments today, it would be wise to take a long-hard look at inflation and examine whether or not increasing the monetary supply by 85 billion/month is wise for the economy long-term. According to John Williams of Shadow Stat, if the U.S. had utilized the same measure for CPI (consumer price index) that was utilized in 1980, the real inflation rate would be more like 12.3% rather than just under 2% which is currently the calculation. The major difference in the CPI calculations is that after 1983, changes were made to the measure of inflation that excluded some major factors such as housing prices and other significant products from the consumer price index. If those were to be included, the real inflation rate would be extremely disturbing to most Americans. That being said, is it time for Americans to be concerned by the total disregard of inflation in the form of monetary stimulus? As an investor it may be time to examine alternative investment methods such as a hedge in gold and silver, to protect your investment from long-term inflationary problems. For more information find a redhawk advisor near you to discuss the options available to you.