Federal Reserve Stunner

Right when you think the Federal Reserve can not say something new, they pull one out of their hat. This afternoon they said they do not plan on considering raising interest rates until Mid 2013.  Take that in for a moment, that is two years from now. Never has the fed ever said something like that.   Add to that the fact the US Treasury auction today was heavily subscribed, or had a 3 to 1 cover ratio. People being afraid bought treasury bonds thinking their money is safe there. The three month bills are trading at 0.043%, basically nothing. Lending your money to the government for that period of time, considering inflation, or for free. !0 year bonds are selling at 2.37% which is saying I am willing to take on huge inflation risk for 10 years out and lend my money to the government for basically little or nothing.

 

The Federal Reserve by this action is also saying they expect the country to be in a very slow recovery, if you can call this a recovery, for some time to come. Finally as I have noted before they are also saying you need to find somewhere else to put your assets because we will pay you nothing lending it to us. This again is an effort to force assets elsewhere in an effort to get the economy moving forward. Buy a house, buy some stocks, invest in a business, anything but lend it to the US government. Of course people who are fearful will ignore this and continue to give the government their money.

 

This could put a floor under the market for the time being. It could also make investors and traders think things are REALLY bad if the Federal Reserve is ok with interest rates basically zero for two years. But macro economic conditions of no economic growth could continue to limit capital investments. Add in the negative political atmosphere you will likely continue to see nothing happen until the next election either changes things or embeds current no growth conditions.  

 

This does make investments in blue chip dividend stocks more attractive. It also continue to make buying a home for your own living a solid investment too. Finally as I have noted numerous times this makes agency REITS a great buy. Take our pick, NLY, HTS, CYS, AGNC, or any of serveral more. I have a postion in HTS and will likely take a position in AGNC sometime in the next week or so.

 

One final note, this for all intents and purposes takes the Federal Reserve out of the 2012 election. Nothing you do will change our direction.