Equity markets spiked last week on the Federal Reserve’s announcement of its plans for Quantitative Easing Part Deux (QE2). QE2 will include the Fed reinvesting proceeds from existing holdings that are maturing, as well as purchasing an additional $600 billion of long-term government bonds between now and June 2011. The hope is that by purchasing government securities long term interest rates will be kept down, thus allowing the economy and the housing market more time to recover.
Personally, I do not see QE2 solving any of our structural issues, but it will be effective in keeping long-term interest rates down for a while longer. This supports Pinnacle Trust’s opinion that the economy will continue to grow at a sluggish pace well into 2011 or 2012.
On Friday I had the opportunity to speak in person with Phil Orlando, Chief Equity Market Strategist for Federated Investors. He very eloquently told me, “I don’t think it is wise to step in front of a $600 billion freight train.” I could not agree more. The Fed will do whatever it has to do in order to keep the recovery moving. Longer-term, we still have structural debt issues and need to deleverage our economy. This process will likely lead us into another recession; but for now, don’t fight the Fed.
Knowing what the Fed is doing, we turn to fiscal policy and the landslide midterm election results from last week. The American people spoke loud and clear on Tuesday. Concerns over government spending were the main factor in one of the most radical shifts of power in American history. Congress and the Senate now face the task of coming up with a plan to address budget deficits without throwing the economy right back into recession.
Fiscal policy set today will determine how the economy plays out over the coming years. If policy addresses the debt issue in a methodical and logical manner, confidence will be instilled in the markets and the next downturn will be more normal on a historical basis. If not, we will see a loss of confidence that will lead to another major downturn.
Jeremy Nelson, CTFA
VP & Investment Officer