Sunday, June 9, 2013 – 07:30 a.m.
What will the Federal Reserve do about its bond buying program to keep long-term interest rates down?
It’s been the big question on the minds of Wall Street and economists of late.
The Fed is printing $85 billion each and every month and using that money to buy up government and mortgage-backed bonds. By doing so the Fed creates a higher demand for the bonds, thus artificially keeping bond prices high and corresponding interest rates low.
The Fed has bought up some $2.5 trillion in bonds over the past few years. That’s right trillion with a “T”.
All of this liquidity sloshing around in the investment and banking world has had some interesting effects.
The stock market has had a meteoric rise in tandem with the Fed spending, while at the same time real estate prices have climbed driven by investor purchases.
In addition to the Fed spending $85 billion on fresh bond purchases, they also continue to reinvest proceeds from their maturing investments.
Here’s some nice questions to ponder:
When, not if the Fed stops, or tapers, its largess, how much will bond yields rise?
Will yields rise enough to pull down stocks?
Will rising rates crush any housing recovery?
What effect will it have on the currently sluggish recovery?
The Fed publishes its balance sheet weekly. So, if there is any tapering of the current bond-buying binge, we will all see it as it starts.
Expect a rocky road ahead.