Behind The Mic With Joe Mathieu: Fed Starts Pulling Off The Band-Aid
BOSTON (CBS) – The Federal Reserve had a choice. Rip off the Band-Aid and take the pain or slowly pull it off in hopes we don’t feel anything.
It went with the latter. And so far it doesn’t hurt. Certainly not on Wall Street. The news helped to send the Dow Industrial Average to a new closing high.
So what’s this all about?
As someone who covered the Fed for the better part of a decade in Washington I can tell you that policy makers use their own language with terms like “taper” and “quantitative easing.”
And they do it on purpose so most people don’t know what they’re talking about. For real. It’s called Fedspeak and I’m going to translate for you.
You might be surprised by how simple it actually is.
The Fed has been buying billions of dollars worth of bonds every month to keep interest rates near record lows. That makes it’s cheap to borrow money and hopefully we spend it. They call that quantitative easing or QE.
And now that the economy is improving the Fed has decided to gradually slow down – or taper – the program.
It’s kind of like taking the training wheels off your kid’s bike. It may be scary but it means your kid is learning to ride.
This will eventually mean higher interest rates. But the Fed is promising a gradual increase. Slowly pulling off that Band-Aid.
Analysts say that’s a big reason why stocks went up. And many believe they will keep rising, even after this year’s remarkable 26-percent rally. That’s because corporations have been hoarding cash in advance of an economic rebound. And that pile of cash has grown to some $1.25 trillion.
These companies will have to put that money somewhere at some point.
And for now, the stock market is the only place where it can really grow.
Follow Joe on Twitter @joemathieuwbz