Financial Adviser Dempsey to Moneynews: Fed Aims to Inflate Stocks To Help Baby Boomers Retire

Wednesday, 12 Dec 2012 07:06 PM

By Forrest Jones and David Nelson

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The new policy unveiled by the Federal Reserve likely aims to push up stock prices to appease baby boomers, many of whom are invested in equities, said Edward M. Dempsey, founder of Pension Partners LLC, a New York City-based financial adviser.

At this week's monetary policy meeting, the Fed unveiled plans to beef up its current quantitative easing 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 snap up an additional $45 billion in Treasury holdings from financial institutions alongside its purchases of mortgage debt.

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Quantitative easing aims to stimulate the economy by pumping liquidity into the financial system in a way that keeps interest rates low to encourage investing and hiring, with rising stock prices and a weaker dollar as side effects.

With monthly purchases totaling $85 billion in assets that inject freshly printed money into the economy, clearly the Fed wants stocks to rise on top of its stated goal to see improvements in the labor market, Dempsey told Newsmax.TV in an exclusive interview.

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

"If you step back to what our viewers are looking at, the Fed knows, as does the government, that you have all of these baby boomers who have a lot of money in 401(k)s, who have a lot of money in the stock market," he said.  "The stock market is actually much more stimulative than the Fed, so
I think the Fed intends to keep pushing those asset prices up to help those baby boomers retire."

The Fed added that interest rates will stay low until the unemployment rate, currently standing at 7.7 percent, falls to around 6.5 percent, provided inflation doesn't exceed 2.5 percent.

That's going to take a long time, Dempsey pointed out, which could give stocks a long-term safe-haven status enjoyed by bonds today.

Meanwhile, foreign stocks stand to post gains as well, once Federal Reserve liquidity makes its way to other markets.

"We actually think right here, right now, the rotation within equities is probably to emerging markets because the Fed's efforts should start to really have a suppressive or depressive effect on the dollar," Dempsey said.

U.S. stocks have posted solid gains over the year, which will make equities outside of the U.S. attractive in today's times marked by low interest rates.

"Emerging markets have not done very much. It's the U.S. markets that have been very powerful."

Gold often rises when the Fed loosens policy, and while the yellow metal should gain as the Fed stays loose, stocks could rise more.

"Gold has been in a bull market since 1999. It's made new highs every year since 1999. Stocks have not," Dempsey said.

"You could have gold go up, but you might have stocks go up a lot more."

Editor's Note:
Economist Warns: 50% Unemployment, 100% Inflation Possible

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