Federal Reserve Says We Should Only Focus On The Benefits

November 3, 2010

The Federal Reserve today announced that it will create $600 billion to buy bonds over the next eight months ($75 billion of purchases per month.) Also, that we not worry about the extraneous things and focus instead on the benefits. These bond purchases will:

1, Lower interest rates to help with home purchases, business loans, etc.

2. Lower the dollar to help exports by making U.S. exports cheaper

3. Increase commodity and equity prices giving a nudge to inflation

I could give a list of reasons why this will not work, but I want to focus on two other major problems.

One, the Fed has blinders on. It is focused only on the “positives” and not the “negatives.” For example, lower interest rates could be a buying incentive if consumers wanted to spend. Evidently, a rate of 2.65% for ten years is too high. The Fed also needs to look at the people who are hurt by this policy. Savers, at these low rates, are being punished. We need savings so we can invest in growth.

Two, the Fed is only focused on short-term results. They may get some of the results they want; but long-term, the debasing of the dollar will reduce buying power and cause inflation.

The policy has been decided and will now be implemented. We have to determine how it will affect our business plans and our portfolios.