For the past month Federal Reserve officials have spoken about the likelihood that the Fed would soon begin to scale back their quantitative easing. During the last round of easing, the Fed has been printing $85 billion each month and then buying US Treasury bonds and mortgage-backed securities.
Wednesday Fed Chairman Ben Bernanke announced that Fed officials have decided to continue propping up the US economy and keeping interest rates at near 0%. This is good news or bad news depending on who you are.
For the stock market it was great news. Immediately after Bernanke’s announcement, stock trading increased dramatically. Why? Because the Fed’s actions keep interest rates low, which makes interest-paying investments (savings accounts, certificates of deposit (CDs), bonds) far less attractive than stocks. Many who had been holding their money to see which direction the Fed would move, were quick to buy stocks after the decision was announced. The Dow Jones Industrial and the S&P 500 both closed at record highs.
For those of us in the financial lower and middle classes, this news was good only if you want to buy a house and can qualify for a low interest loan. For the rest of us, low interest rates make it hard to get ahead. In 2006-2007, interest on my checking account was around $20 per month, now it is about $1. Even CDs held over 2 years earn less than 1%. Most of us do not have the somewhat large amounts of money to invest in stocks outside of our retirement accounts, which often have yearly contribution limits.
For President Obama the Fed news was both good and bad. Bernanke said continuing Fed intervention is necessary because the economy is not growing as expected, which means the Obama administration’s economic strategy is not working. The good news for the President is that additional “investment” by the Fed will continue to prop up his failed strategy and make the economy look better than it really is.
So when you hear glowing news reports about inflation, jobs created, etc. do not feel like you are the only one still struggling financially. Realize that actions by the government and the Federal Reserve are putting a false front over the reality that most of us face every day.