The minutes from the June meeting of the Federal Reserve indicate that the Fed is leaning more heavily toward a third quantitative easing (QE3). Many investors were hoping for action from the meeting, but received none. It appears that some Fed governors are waiting for the need to cut forecasts once again.
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Nevertheless, growing concerned fueled by China’s slowing economy, Europe’s continuing failure to stem its crisis beyond a short-term fix, and the looming fiscal cliff that is due to occur when current tax laws expire at the end of the year.
US economic indicators continue to disappoint with the jobs reports leading the way on that front. Fed officials are mixed in their discernment of whether the slowdown is a temporary glitch because of other world economic factors or if it indicates the US is headed back into recession.
In statements after the June meeting, the Fed did clarify criteria for acting on a QE3. The three criteria included more definitive signs that the momentum sparking economic growth at the beginning of the year is gone, more pronounced risks to the downside, and an indication that inflation will fall below the Committee’s long-term objective.
Enacting a QE3, extending its target for raising interest rates, and continuing to dry up supply in the bond market are all tactics the Fed can take to spur growth
. The idea behind drying up bond supply is to force investors into other securities and investment vehicles such as equities. This would, hopefully, spur consumer spending and investment.
Regardless of the action or inaction of the Fed, having a sound investment plan that stays true to investment policy yet allows flexibility to accommodate and/or hedge against short term market forces can keep your clients focused on achieving their ultimate objectives. This is one of the most valuable services we can offer them.