This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

What Janet Yellen Doesn't Want You to Know About QE5

BALTIMORE (Stockpickr) -- Think you know what the new Fed boss is up to these days? Think again.

In fact, even as investors feel all hunky dory about stocks again, the Fed looks closer to another round of quantitative easing than it's been anytime in the last year. And it could be a good thing for stock investors.

Let me explain.

This month, brand new Federal Reserve Chairwoman Janet Yellen dropped a "bombshell" on Congress: Even if unemployment does fall below the previously stated 6.5% threshold in 2014, the Fed still wouldn't ease up on its zero-interest-rate policy.

>>5 Rocket Stocks Ready for Blastoff This Week

Yup, it was a real bombshell all right. Oh, and did you hear that Ben Bernanke is starting to lose his hair? That's the caliber of surprise that Yellen's announcement should have been to Wall Street. None at all.

That's because the Fed's interest rate and QE efforts have nothing to do with jobs, GDP growth, stock prices, or any of the other metrics that everyone's focusing on right now. There's just one metric that matters when it comes to stimulus money: inflation.

More specifically, the Fed is targeting a pretty narrow definition of inflation: a 2.2% minimum in the Feds 5-Year Forward Inflation Rate (Note: Thats also 0.2% higher than the Feds stated 2% target for inflation.)

Take a look at how well that 2.2% level acted as signal to open the floodgates on another round of QE to date:

Every time the Fed's inflation gauge has dipped below 2.2%, the Fed has launched a major stimulus program. Put a different way, the chart above has never crossed the 2.2% mark without the Fed immediately announcing a far-reaching QE initiative. In my view, that makes the chart above pretty important to investors.

It also reveals an interesting fact about where the Fed's mind is right now. In 2012, Bernanke and company got more aggressive with stimulus money, launching QE3 and QE4 well before inflation reached its "critical" level. But that makes sense. After all, each of the first three rounds were a stop gap designed to keep the economy from the perils of deflation. With QE3 and QE4, the Fed was giving the economy a shot in the arm, hoping to jumpstart an uptrend in inflation before it got to that precarious point.

>>5 Hated Stocks That Could Get Squeezed Much Higher

The taper is an experiment. Yellen's Fed wants to see if inflation can stay above the white line even if they publicly give the buying a rest. But the initial reaction isn't promising. Since the taper started, five-year forward inflation has been dropping like a rock, pushing to the lowest levels we've seen since the start of 2013.

1 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,055.87 -116.81 -0.68%
S&P 500 1,982.77 -11.52 -0.58%
NASDAQ 4,508.6880 -19.0010 -0.42%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs