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Has Bernanke Lost His Inflationary Ways?

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November 13, 2012 – Comments (0) | RELATED TICKERS: TOL , WFC , JPM

Everyone knows that the Federal Reserve Bank Chairman Ben Bernanke is responsible for the asset prices in the United States. Since the financial crisis began in 2007 it has been Chairman Bernanke's policies that have inflated the stock markets not the policies put forth by President Obama. In December 2008, Chairman Bernanke cut the fed funds rate to basically zero percent. The fed funds rate is the overnight interest rate that is given to the large banks such as Citigroup Inc (NYSE:C), J.P. Morgan Chase & Co (NYSE:JPM), Wells Fargo & Co (NYSE:WFC), and Bank of America Corp (NYSE:BAC). 

The powerful central bank has also been buying mortgage backed securities (MBS), U.S. Treasuries, and other debt instruments. These purchases are called quantitative easing by the Federal Reserve. The central bank is now on its third quantitative easing program called QE-3. This latest and greatest stimulus program includes the purchasing of $40 billion in mortgage-backed securities each month. The ending of this program has not been announced and that is why many investors call it QE-eternity. All of these bond buying programs artificially push down long term interest rates. Lower interest rates allow money to be easily accessible for qualified borrowers. These policies have certainly helped to boost the U.S. housing market which has been very depressed since 2007. 

Leading home-builder stocks such as Toll Brother Inc (NYSE:TOL), Lennar Corp, and others stocks in the sector are now trading near four year highs. The last time the Federal Reserve cut interest rates so aggressively was in 2002. Many traders and investors blame the central bank for the last housing and credit bubble. Could they be creating another bubble at this time with these extremely low interest rate policies?

Since the 2009 low in the S&P 500 Index the stock market has faced several major stock corrections. To the credit of the Federal Reserve and Ben Bernanke they have been able to inflate the stock markets higher just before a major technical breakdown in the major stock indexes. Many investors will say that you should never fight the Federal Reserve. So far, every stock market dip has been a buying opportunity. What will happen when and if the stock market no longer inflates from the central bank's monetary policies? This is where it pays to be a technical trader and investor in the stock market. A strong case can be made that the central banks around the world simply create bubbles before the next recession and possible stock market collapse. This is why it should be a traders market for years to come. The real concern for traders and investors is going to be when the central bank can no longer inflate the stock markets higher. Until that time, trade the technical charts. 

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