NEW YORK – The stock market rallied on Wednesday afternoon, with the Dow Jones Industrial Average closing at a new all-time high of 16167.97, registering a gain of 292.71 points.
The spike followed a decision by the Federal Reserve Open Market Committee to continue buying U.S. government debt at the rate of $75 billion a month, compared to the $85 billion a month maintained throughout this year.
Wall Street had been concerned the Fed might “taper off” to a much larger extent buying U.S. government debt – known as “quantitative easing,” triggering fears that the stock market could drop precipitously.
Investors’ indicated a reduction in quantitative easing by only $10 billion a month was insignificant. The Federal Reserve will continue pumping $75 billion a month for the foreseeable future into U.S. government debt, including the U.S. Treasury debt the Obama administration issues to finance the federal budget deficits, which have been about $1 trillion since 2009.
The favorable market reaction to the Fed’s decision Wednesday takes immediate pressure off retirement savings.
WND has reported IRA and 401(k) retirement savings invested in the stock market could take a nosedive should the Federal Reserve decide to end or cut back QE to only a fraction of the current level.
However, should the Fed continue to buy U.S. debt at the rate of $75 billion a month throughout 2014, the Federal Reserve risks adding $900 billion of federal government debt on the Fed’s liability sheet.
Will the Fed ever quit buying U.S. debt?
“The Fed will never end QE for good,” Marc Faber, editor of the well-known Gloom, Boom & Doom report on Wall Street said on CNBC Tuesday. “They will continue because these programs, once they’re introduced, usually keep going.”
Faber warned the Federal Reserve’s quantitative easing is creating a stock market bubble that will inevitably burst.
“The economic recovery, or so-called recovery, by June of next year, will be in the fifth year of the recovery,” Faber said. “So at some stage the economy will weaken again, and at that point, the Fed will argue, ‘Well, we haven’t done enough, we have to do more.’”
Faber warned that the Federal Reserve Open Market Committee’s decision Wednesday would not be true tapering, but a largely meaningless, one-time move that would eventually be reversed, with QE restored to previous levels once the economy worsens, as he expects it will.
“The Federal Reserve – all of them – could be sitting on a barrel of dynamite, and then pouring gasoline on top of it, and then light a cigar with matches, throw the match into the gasoline, and then not notice that there is any danger,” Faber said. “That is the state of mind of the professors at the Fed, who never worked a single [day] in business.”
Faber suggested that the Fed was addicted to quantitative easing.
“They may do some cosmetic adjustments, but in my view, within a few years, the asset purchases will be substantially higher than they are today,” Faber said.
Bernanke packs Fed balance sheet with U.S. debt
As WND reported in January, Fed chairman Ben Bernanke is known among professional economists as “Helicopter Ben,” for his tendency to hover over developing financial crises only long enough to hurl seemingly endless dollars on the problem.
In December 2012, Bernanke reached a new milestone, doubling the magnitude of U.S. debt since the day he became chairman in 2006.
U.S. national debt skyrocketed from $8.183 trillion on Feb. 1, 2006, to $16.366 billion on Dec. 12, 2012.
On Dec. 12, 2012, the Fed officially announced the launch of Quantitative Easing 4, amounting to a fourth annual round in which it would buy U.S. debt, including both U.S. Treasuries and Mortgage Backed Securities Bonds commonly issued by investment firms and commercial banks.
The Fed announced it would enter 2013 with a plan to purchase $45 billion a month of U.S. Treasury securities and $40 billion a month of mortgage-backed securities. It was part of a continuing Fed plan to depress long-term interest rates and encourage, borrowing, spending and investing, the Wall Street Journal reported.
In the December 2012 announcement, the Fed set specific targets, declaring an intention to keep short-term interest rates near zero into 2015, or until unemployment fell to 6.5 percent and as long as inflation forecasts remain near the Fed’s 3 percent target.
“The key point here is that the Fed is now actively running both monetary and fiscal policy, because it will now be in the business of funding nearly 100 percent of all the new government deficit spending in 2013,” concluded Chris Martenson of Peak Prosperity. “And it is pumping a bit more than $1 trillion of hot, thin-air money into the economy as it does so.”
In December, the Federal Reserve revealed that its holdings of U.S. government debt had increased to an all-time record high of nearly $2.2 trillion.
By comparison, when Obama was inaugurated in 2009, the Fed owned a mere $475 billion in U.S. government debt.
The Fed’s holdings of U.S. government debt have increased nearly 500 percent since Obama took office.
The U.S. Senate is expected to confirm Janet Yellen to replace Bernanke as head of the Fed, despite the continuing attempt by Republicans to slow the confirmation of Obama administration appointees after Senate Majority leader Harry Reid employed the “nuclear option,” ending the requirement for a “supermajority” of 60 votes to force a vote on Obama administration nominee confirmations.
After Wednesday’s Federal Reserve Open Market Committee’s decision, Yellen, currently vice chairwoman of the Board of Governors of the Federal Reserve, is expected to continue “tapering down” QE, but only to the extent of the $10 billion a month cutback announced in Bernanke’s last FOMC meeting Wednesday.