Markets Have Posted Big Gains Since Fed Launched QE2Despite the concerns of Republican leaders about the Federal Reserve's second round of quantitative easing, stock and credit markets seem to approve of the so-called QE2: They've improved significantly since the plan was announced, Bloomberg reported Friday. But can that rally be solely attributed to QE2?

Conservatives say they fear the effect that QE2 could have on the strength of the dollar and suggest it could fuel long-term inflation and asset bubbles. Monetary policymakers, though, are more concerned about the dangers deflation and its effect on borrowing costs, and they have acted accordingly.

Fed Chairman Ben Bernanke first indicated on Aug. 27 that the central bank might buy more government securities to boost the U.S. economy. On Nov. 3, one day after the midterm elections, the Fed announced a plan to buy as much as $600 billion worth of Treasury bonds through June.

Stubborn Unemployment

Since Aug. 27, the Standard & Poor's 500 stock index has climbed 17%. Junk bonds also rallied, with the spread over government debt shrinking. Spreads on investment-grade corporate bonds also narrowed. Also, while the dollar is down 3.5% since Aug. 27, it has gained about 1.2% since QE2 began. And inflation has remained tame, according to the recent consumer price index report.

The one major criticism of QE2 is that it hasn't actually worked. In fact, Treasury bond yields have jumped as their prices tumbled. The yield on the benchmark 10-year Treasury note has climbed to 3.42% from 2.64% on Aug. 27, according to Bloomberg.

Another big thorny issue is the high unemployment rate, which rose from 9.6% to 9.8% in November. The pace of economic growth is "insufficient to bring down unemployment," the Federal Open Market Committee said this week.

However, recent economic reports on retail sales, industrial production and consumer confidence signal the recovery is gaining strength. In addition, economists have been boosting their estimates for growth next year to include the stimulus effect of President Obama's tax cut compromise deal, which passed the House at midnight Thursday.

Some say it's these positive signs, as well as the European sovereign debt crisis, that have been mostly driving U.S. stocks higher. Whatever the real reason, the recent market rally is a welcome development.

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Just keep that Fed money pumped into the market or everything is toast.

December 18 2010 at 2:29 AM Report abuse rate up rate down Reply

There is no where else to really make money other than the stocks. This will create a hugh bubble that will eventually collaspe. The interest rate is so low doe3s the FED raise the rates to justify the rise in the stock market? It's all being manipulated by the big boys to make their quick buck when the stocks are at the highest. The ones that would be hurting bad would be the lower end people who would be stuck with the stocks after the big boys pull thier's out when they hear the insider noises. I say the stock market could go up high but the regular people better watch out and watch it very close. They need to educate themselves to know how to pull out quickly. The QE is just a manipulating trick into thinking the economy is improving. Have you seen the price of oil lately? It is rising slowly to the breaking point again. The common person will not have the extras top pay for fuel. Then I would watch to see if the States are seeing an increase in the food stamps allotments.

December 17 2010 at 2:57 PM Report abuse rate up rate down Reply