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All Aboard the QE 2 - that's 'Quantative Easing 2' to you!

Guest post by: Catherine Avery

Article Overview: If you've been keeping abreast of news on the financial front you'll have probably heard the term "QE 2" mentioned. (And no, it does not refer to the Queen Mary 2!!) QE 2 stands for "Quantitative Easing" and is The Federal Reserve's second such attempt at a more unconventional tool to try and lower interest rates and jump start our slow economic recovery. Read on to learn more.

All Aboard the QE 2 - that's 'Quantative Easing 2' to you!

Broadly speaking QE 2 means that The Federal Reserve will pump $600 billion more into the US economy and keep interest rates at historical low levels. In a November 3 article CNNMoney.com explains more specifically: " The central bank will buy $600 billion in long-term Treasuries over the next eight months.... The Fed also announced it will reinvest an additional $250 billion to $300 billion in Treasuries with the proceeds of its earlier investments." Instead of lowering interest rates directly, the government is buying Treasury Bonds as a means of driving already low long-term interest rates even lower, in order to try and get consumers and businesses to spend (ie: lower rates entice people to take out a mortgage or another loan.) All this is a second effort (the first round happened in 2008 hence the name QE 2), to stimulate our economy. By lowering rates, the Fed devalues the dollar, which has the effect of driving up commodity prices including stocks. What does this mean for you, the investor? QE 2 lowers bond yields making it harder for people to get an income from bond-like vehicles. It also increases bonds' risks. And there could be other negative outcomes. In an article on yahoo.com entitled: 'The Fed's big gamble: Here's what could go wrong,' author Matthew Craft notes that: "It could make the weak dollar even weaker and lead to trade disputes with other countries. It could lead bond traders to believe that inflation will run wild, and they derail the Fed's efforts by pushing rates higher. Many investors argue that it may create bubbles as hedge funds and other speculators borrow cheaply and make even bigger bets on stocks, commodities and markets in developing countries like Brazil." Given all this, and amid the current economic environment, what should you do with your investments you might ask? At CAIM, LLC we believe that many high quality companies have dividend yields of 3 % or more compared to the 5-10 year Treasury notes of 2.66% and 1.24% respectively. Companies like McDonald's and International Business Machine are borrowing at incredibly low rates and increasing their dividend yield. All of which means that quality corporations have been able to benefit from this low interest rate environment. Buying their stocks at dividend yields greater than the borrowing rate makes it advantageous to the investor. Copyright 2010, CAIM, LLC

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Article Tags: economic recovery, federal reserves, interest rates, qe 2, quantative, quantitative easing
Referred by: http://elliacommunications.com



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