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Effect of QE2's End May Be Greatly Exaggerated (Lip p/hank)

edited May 2011 in Off-Topic
Interesting read from Barrons. My take on the minutes released yesterday as reported in Reuters is that the Fed is likely to raise interest rates sometime in the next year and before they begin selling off the debt instruments they have purchased. They want a feel for what will happen when rates start rising and want to get the rates higher so they have some ammunition to lower them when necessary if that makes any sense.

RE: the linked article. I think QE2's end has been somewhat discounted by the markets in advance. On the other hand, if markets wanted an excuse to go down, that would provide one and likely a buying opportunity. I think pulling in a bit as Skeeter has done and I as well is prudent since markets have doubled in such a short time. However, not ready to bail big time. Expect higher stock markets yet this year with Dow crossing 13,000 at least temporarily in the next several months. Congress has the potential to screw this up big time with the debt ceiling stuff, but bets are they won't. Don't some of them Congressmen own stocks too?

http://finance.yahoo.com/banking-budgeting/article/112772/QE2-effects-barrons;_ylt=Ap0kt3UhgiFyQagKKkNYfK27YWsA;_ylu=X3oDMTE1aXVycnQ0BHBvcwM5BHNlYwN0b3BTdG9yaWVzBHNsawNlZmZlY3RvZnFlMnM-?mod=bb-budgeting&sec=topStories&pos=4&asset=&ccode=&sec=topStories&pos=6&asset=&ccode=

Comments

  • If they raised rates and then sold off assets, wouldn't that cause losses to at least a significant portion of assets on their balance sheet?
  • Hi Scott,

    (1) Perhaps, but remember those assets have risen in value as rates have fallen. They should be sitting on a nice profit.

    (2) The initial increase would be quite small, something like a half percent or so. If it caused a "fear" response in the markets, long term bonds could actually rise at first.

    (3) Some of the assets are in mortgages which hold value better in a rising rate environment, though not immune. To the extent the economy is improving this should also bolster their mortgage holdings.
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