Basically what this Federal Reserve decision means is that the Government is purchasing US treasuries with newly printed money in the hopes of injecting more liquidity into the markets and to prevent a bout of deflation that has been lurking in the shadows. General inflation has been extremely low throughout the recession even with record amounts of money being forced into the economy. The only way the Fed thinks it can prevent a period of deflation is to inject more money into the economy which should lower interest rates even further and make money even more available. The stock market loves this in the short term as the more money is in the market, the higher stock prices should go. However, the long term effects of this 600 billion dollar gamble are not so clear. Any form of government intervention into the market through money printing lowers the value of each existing US dollar. The Fed believes that the boost to the economy is worth this side effect, but many economists do not. They fear that we are setting ourselves up to further devalue the dollar which will make us less and less attractive to foreign investors and which could lead to the dollar eventually being replaced as the worlds major currency. As a side effect of all this money being injected into the market, products that hedge against inflation continue to see steady gains including gold. This is really a huge gamble by the Fed, and at the moment we can’t really say if it will work or not. What we can count on in the short term however is a continued rise in gold prices and a continued boost in stock prices through the rest of 2010.
Readers, how much do you fear inflation due to this move? Are you hedging your investment portfolios with products that protect against an ever weakening dollar?
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