Wiedemer to Moneynews: More Fed Easing Is ‘Insurance Policy’ Against Market Collapse

Wednesday, 12 Dec 2012 02:50 PM

By Forrest Jones and David Nelson

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The Federal Reserve's decision to beef up an existing monetary stimulus program may in reality be little more than a move to prevent stock prices from collapsing, said Robert Wiedemer, financial commentator and best-selling author of "Aftershock."

At its December monetary policy meeting, the Fed announced plans to bolster its current quantitative easing (QE) program, a monetary stimulus tool that sees the U.S. central bank buy $40 billion in mortgage-backed securities a month from banks on an open-ended basis to spur recovery.

Going forward, the Fed will now purchase an additional $45 billion in Treasury holdings from financial institutions alongside its purchases of mortgage debt.

QE functions by pumping liquidity into the economy in a way that keeps interest rates low to encourage investing and hiring, with rising stock prices and a weaker dollar as side effects.

The additional Treasury purchases will replace the Fed's so-called Operation Twist program, under which the Fed swaps $45 billion a month in short-term Treasurys for long-termer U.S. government debt — that policy will expire at year end as planned.

The Fed will begin injecting $85 billion in freshly printed money into the economy a month to stave off economic decline by pushing down borrowing costs to encourage investing and hiring, though the idea may really be to keep stock prices high and investors happy.

"I think it's an insurance policy more for the stock market than it is for unemployment," Wiedemer told Newsmax TV in an exclusive interview.

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"I think it's an insurance policy not necessarily against keeping the market where it is, but an insurance policy against any kind of collapse,"  added Wiedemer, a managing director of Absolute Investment Management, an investment-advisory firm for individuals with more than $300 million under management.

"They may see a weakness in the stock market that we are not necessarily seeing. This should certainly prevent a collapse, but I don't know if it is going to keep [the Dow] up at 13,000."

The Fed added that it will keep benchmark interest rates at a target 0.25 percent until one of two things happen: the unemployment rate drops to 6.5 percent or inflation rates threaten to break 2.5 percent.

"The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal and longer-term inflation expectations continue to be ell anchored," the Fed said in its December monetary policy statement.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

The unemployment rate currently stands at 7.7 percent, according to the November jobs report, though such an aggressive monetary easing program may suggest underlying weaknesses threaten the country of which most are unaware.

"Maybe the Fed knows something we don't. I think they are trying to send us a signal. Let's face it, unemployment is falling by the government's figures and theoretically you've got a little bit of a rebound because of housing," Wiedemer said.

"It's amazing that the Fed feels so nervous that they are ready to print $1 trillion, and that's equal to our entire money supply back in 2007. So I think the Fed may know more than they are letting on. I think they are sending a signal that something is up that is maybe something we are not seeing on the surface, but they know more."

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

Markets bumped up on the news but stopped short of a full-fledged rally.

"It's not necessarily going to push this market up, but I think it's going to keep it from certainly falling dramatically," Wiedemer said.

Treasury Inflation Protected Securities (TIPS) and gold will do well amid such policies.

"Gold did take a nice spike after this, but will take a few days to let it shake out, but it's certainly the foundation, I think, for a longer-term movement upward in gold," he added.

"Gold is already up a nice 8 percent-plus this year and I think we could see more of the same next year."

About Robert Wiedemer
Robert Wiedemer is a managing director of Absolute Investment Management, an investment-advisory firm for individuals with more than $300 million under management. He is a regular contributor to the Financial Intelligence Report, the flagship investment newsletter of Newsmax Media. Click Here to read more of his articles. Discover more about his latest book, "Aftershock," by Clicking Here Now.

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