The major stock indexes have not really moved much this morning. Many investors are now waiting for the Federal Open Market Committee (FOMC) meeting to conclude this afternoon. Most traders and investors are expecting the Federal Reserve Bank Chairman Ben Bernanke to keep the Fed funds rate (overnight lending rate to the large banks) at zero to a quarter percent. The Fed funds rate has remained at 0% - 0.25% since December 2008. So basically, the large banks such as J.P. Morgan Chase & Co (NYSE: JPM), Citigroup Inc (NYSE: C), Bank of America Corp (NYSE: BAC), and Wells Fargo & Co (NYSE: WFC) can borrow money at zero percent and lend it out at a higher interest rates, speculate on equities, and buy bonds with the money.
Many traders and investors are now expecting the Federal Reserve to implement another quantitative easing program or QE-3. The markets are already factoring in an extension of Operation Twist which is scheduled to end in late June 2012. This is where the Federal Reserve sells short term bonds and buys longer term maturities in order to keep interest rates artificially low. The today, the 10 year bond yield is trading around 1.66 percent. How much lower can yields go in 2012? That is a good question and we would ultimately expect lower. The 30 year fixed mortgage rate is 3.68 percent which is an all-time historic low.
So what would additional quantitative easing or money printing do for the economy? The answer, not much, but it will help to inflate asset prices and cause more inflation in goods that people need to survive. If the Federal Reserve Bank initiated another QE-3 traders should watch for a spike in commodities such as oil, gasoline, copper, gold, silver, platinum, steel, iron, and others. Some leading equities that could be volatile leading up to the FOMC announcement will be the United States Oil Fund LP ETF (NYSEARCA:USO), United States Gasoline Fund LP (NYSEARCA:UGA), iPath Dow Jones UBS Copper Total Return Sub-Index ETN (NYSEARCA:JJC), and the SPDR Gold Trust (ETF) (NYSEARCA:GLD).
Nicholas Santiago
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