What Current Fed Policy Will Mean for Stock ETFs in 2014
NEW YORK (ETF Expert) -- Stock markets initially plummeted on the notion that the Federal Reserve would print less money, buy less government debt and stand by as interest rates soared into the stratosphere. Very quickly, however, Fed officials extinguished fears of skyrocketing borrowing costs by simultaneously announcing that its policy of zero-percent overnight lending would continue "well beyond" the point at which unemployment reached 6.5%.
In other words, the U.S. central bank taketh away a bit of its electronic dollar creation, yet giveth enormous assurances that it remains dedicated to suppressing interest rates -- by one method or another -- well into the future.
In Chairman Ben Bernanke's news conference, he once again emphasized that tapering currency creation does not constitute tightening. In the past, I have found this idea comical if not downright ludicrous. On the other hand, if one sets out on a course of slowly exiting from a controversial easing program that involves generating more of a currency that had not previously existed, but also guarantees that other easy money policies will remain intact for much longer than anyone would have surmised, the net result constitutes an equivalent level of accommodation. Indeed, the outgoing chairman stated, "The Federal Reserve means to keep the level of stimulus more or less the same."
Equity enthusiasts obviously agreed. The Dow surged 292 points and the S&P 500 closed at a record high on Wednesday. Equally compelling, many of the premier performers in the Fed-fueled rally came from rate-sensitive sectors such as iShares DJ Home Construction (ITB); the exchange-traded fund jumped 3.7% in the single session.
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