Dow: 13,540 (+1.55%) S&P 500: 1,460 (+1.63%)
With QE3, a major German court decision and the iPhone 5, “THE BIG 3″ (or Los Tres Grandes, for MarketSnacks fans south of the border) have officially arrived and Wall Street is Hot-Hot-Hot like South Beach. Yesterday’s news that the German constitutional court confirmed the legality of the Eurozone bailout fund lifted stocks up early and excitement over Apple‘s newest wonder-phone propelled the stock to an all-time high of $683.29 this morning. Then, with the 2-day Federal Reserve policy meeting concluding, Chairman Ben Bernanke’s highly-anticipated afternoon remarks about what the nation’s central bank plans to do to help spur economic growth pushed stocks really f**king northward. All 3 major stock indices reached multi-year highs and the Dow added 207 points on the Fed’s fancy new stimulus moves. Here’s how it all went down…
Federal Reserve announced 3rd round of “Quantitative Easing” after 2-day policy meeting
The Federal Reserve Bank announced today that it would purchase $40 billion of mortgage-backed securities every month to inject the economy with cash and stimulate economic growth. Chairman Ben Bernanke will fire up the printing presses, tie rolls of $100s with rubber bands and walk out like Santa Claus carrying a sack of cash on his back. This highly anticipated stimulus decision, or “QE3,” is the 3rd round of quantitative easing since the financial crisis, but, unlike QE1 and QE2, this one is for no pre-determined amount and will continue until the labor market improves substantially. This is a clear message of the Fed’s stance to the economy: it will do whatever it can to reduce unemployment and isn’t as worried about the threat of inflation potentially caused by the injection of cash. But why QE3? The Spark Notes version: bond buying lowers interest rates, increases investment, and the economy grows.
You’re not applying for a job at Spark Notes though, so here’s a bit more. The Fed will buy “mortgage-backed securities,” which are bonds that make interest payments to the bondholder – and the money for these interest payments originates from the mortgage payments that your mom and dad pay on your house (that’s why the bonds are “mortgage backed“). The influx of demand for bonds by the Fed will increase the prices and lower the yields (bond yields and prices move in the opposite direction). Lower bond yields mean lower interest rates for the underlying mortgages, so the effect is that long-term interest rates, especially mortgage rates, will decrease.
How will this help the economy? Two ways mainly: 1) lower yields (the amount of return on an investment) on long-term bonds will cause stocks to look more attractive as a relative investment ==> people will shift their money to the stock market and stock prices should rise. 2) Lower long-term interest rates means more loans ==> more people will be able to buy homes through mortgages and more businesses owners will take out loans to grow their businesses. Home purchases and business loans are the major investments the economy needs right now to drive growth. Also, people will feel richer when the values of their stock portfolio and home rises, which increases confidence and spending. This is the ideal outcome, and Bernanke is praying the plan works. Pray with him.
- A serious serving of consumer-related econ data: Reuters/University of Michigan Consumer Confidence Poll (Preliminary) for September, August Retail Sales, August Consumer Price Index, July Business Inventories…
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