The Fed has finally taken action!!!

Well the news everyone has been waiting for happened…The Fed announced the launch of QE3.  This announcement on Thursday morning spawned a rally in the stock market driving it up over 200 points.  Investors have been sitting patiently on the sidelines waiting for this news as the Fed’s intervention was not unexpected.  The recent poor employment reports along with increasing jobless claims has the government very concerned about the job market not improving.

The goal of the Fed’s 3^rd round of stimulus is to keep interest rates artificially low.  However, this is a delicate balance because when investors believe that the stock market is going to do well, they take their money out of government bonds and purchase stocks.  This ultimately will have the opposite result that the Fed wants to accomplish.  When investors sell bonds to buy stocks, bond yields rise which indirectly causes mortgage rates to rise.  If mortgage rates rise, then the cost to finance a house rises.  If the cost of financing a home rises then….(Well you get the idea)

Immediate reaction the Fed’s announcement was for the stock market to rally and, exactly as I said, bonds got hammered and rates actually went up. 

I truly understand what the Fed is trying to accomplish.  They believe that keeping rates super low will get the housing market really going.  Here is the challenge however.  We have seen mortgage rates down to the low 3% range, yet this did little to spur housing demand.  The latest round of stimulus is not expected to even bring rates down as low as they were before.

To make matters worse, the two sides of government don’t even talk to each other anymore.  The expiration of tax cuts as well as the automatic trigger of huge spending cuts scheduled for the end of the year, has many people concerned about what is called the “Fiscal Cliff”.  If this is allowed to occur and Congress does not do anything to stop it, it is widely believed that the economy will fall back into recession.  The Fed can only do so much, however until our elected officials decide to go back to work, nothing will change.

First Time Jobless Claims took an unanticipated jump all the way up to 382,000.  The Labor Department blames the jump on the effects of Hurricane Isaac on many states.  It is in those impacted areas that the biggest jump in layoffs had occurred.

Inflation on the wholesale level continues to remain under control when you don’t factor in the volatile food and energy prices.  The Producer Price Index rose a modest .2% which is in line with expectations.  What is interesting to note is that on Thursday when the Fed announced the new round of economic stimulus, the price of oil shot up to just under $99.00 a barrel.  It is likely that $100 a barrel is just around the corner.

 

JJ Mack