Nearly everyday since December the media reports how good things are getting in the economy. This report was better than expected, that report is better than expected and everyone is working again. While the economy might be healing in some way investors must ask themselves why the Federal Reserve is continuing to promote low rates until late 2014. The central bank is clearly dangling the carrot in front of the institutions to buy equities and inflate this market higher. Gold is the ultimate barometer of inflation and yesterday gold soared. The SPDR Gold Shares (NYSE:GLD) rallied by nearly $5.00 after the Federal Reserve announcement yesterday afternoon.
Investors must think for a minute, if things are really getting so much better why would the central bank signal further stimulus and an extremely low rate policy. After all, many investors can argue that it was the low rate policy that caused the housing and credit bubbles just a few years ago. Come to think of it, many can even argue that low rates caused the dot-com bubble in the late 1990’s. Sure, low rates help to create inflation, however, the federal funds rate has been at zero to a quarter percent since December 2008.
The people that get hurt the worst from this type of monetary policy are the elderly and those on fixed incomes. These people rely on interest income from bonds and their savings account. Neither of these investment vehicles produce any meaningful yield. Have you looked at what the interest is on a savings account lately? It is basically zero. Low interest rates also cause prices in everything that people need to rise. Just look at the food and energy inflation after the Federal Reserve implemented QE-2 in late 2010, prices rocketed higher. Food and energy are the most important goods that anyone can spend their money on. If and when another round of quantitative easing does come inflation will surge through the roof. If things were so rosy in the economy the central bank would not keep these rates so low. Remember, this is the month of January which is usually a bullish month. Don’t believe the hype that this economy is in such good shape just because the stock market is moving higher at this time.