People talk about the Federal Reserve’s economic stimulus, but speculation on what it is going to do about it has led to market volatility.
People talk about the Federal Reserve’s stimulus program, but speculation on what it is going to do about it has led to market volatility. Four-in-ten millionaires believe that when the U.S. government stops purchasing long-term bonds, it will cause the stock market to decline, according to a new wealth level study conducted by Spectrem’s Millionaire Corner.
The Fed announced two weeks ago that it would continue to gradually taper its economic stimulus, also known as quantitative easing. The central bank said it would reduce its monthly bond purchases by $10 billion, down to $55 billion a month beginning in April.
Quantitative easing is a strategy designed to pump more money into the economy and keep interest rates low to encourage people to invest in businesses and buy homes. The Fed has been buying bonds since September 2012. While lower interest rates offer the economy a shot-in-the-arm boost, they also mean lower returns on investments. Emerging markets, with higher interest rates and the prospect of better returns, have been seen by analysts as perhaps a more attractive investment. But speculation that the Fed would taper its bond purchases has prompted investors to become more risk averse. These actions have roiled emerging market currencies.
Over the past year, the markets have turned on investor guesstimations on when or if the Fed would taper the program. Last January, following the Fed’s announcement that it would continue to scale back its stimulus plan, U.S. stocks dropped more than 1 percent.
Near-zero interest rates have been in place since 2008. The Fed’s stimulus strategy as to when interest rates would rise has been tied to perceived improvement in the economy, which has suffered a slump tied to a severe and prolonged winter.
After the first Fed meeting earlier this month that marked Janet Yellen’s first as chair, policymakers announced that while they would continue to taper its economic stimulus, it is backing away from the 6.5 unemployment benchmark. Instead, policymakers “will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures added inflation expectations, and readings on financial developments,” the Fed said in a statement.
While the highest percentage of Millionaires surveyed by Spectrem’s Millionaire Corner foresee a market decline should the government stop purchasing long-term bonds, one-third (32 percent) believe that the purchase of those bonds will increase inflation. An equal percentage (31 percent) is in agreement with the stimulus program, while 16 percent said that it had little influence on their economic situation.
Millionaire investors under 45 expressed the most concern that the stock market would decline if the government ends its bond purchases (55 percent, compared with 41 percent of respondents 55 and older. Business owners, too, were more likely than their professional cohorts to forecast a market decline (52 percent vs. 42 percent of senior corporate executives, who expressed the least satisfaction with the policy).
Donald Liebenson writes news and features for Millionaire Corner. He has been published in the Chicago Tribune, The Chicago Sun-Times, The Los Angeles Times, Fiscal Times, Entertainment Weekly, Huffington Post, and other outlets. He has also served as a marketing writer for Chicago-based Questar Entertainment and distributor Baker & Taylor.
A graduate of the University of Southern California, he is married with a college-age son. He also writes extensively about entertainment.