On Wednesday, January 25, the U.S. Federal Reserve said it would keep interest rates at their current exceptionally low level until the end of 2014. Forget about the middle of 2013, which seemed extremely far away when the Fed made that “guarantee” in August. And forget about the beginning or middle of 2014. Now the Fed is talking about the end of 2014.

Almost three years from now. Three years with short-term interest rates near 0%.

Let’s cut straight to the chase for investors: Who wins and who loses from this extraordinary statement of policy by the U.S. central bank? Read more

At 2.8% fourth quarter 2011 GDP growth disappoints–and now we can see what the Fed fears

Is this what the Federal Reserve saw in the fourth quarter GDP numbers that made it pessimistic enough on Wednesday to say that exceptionally low interest rates will be with us until the end of 2014 instead of “just” the middle of 2013?

I’m not talking about today’s headline GDP number, although that was disappointing. The “advance estimate”  (the first estimate and subject to future revisions) showed real GDP climbed at an annual rate of 2.8% in the fourth quarter of 2011. That was below the consensus among economists surveyed by Briefing.com of 3.2%. But well above the 1.8% annual growth recorded in the third quarter of 2011. Fourth quarter growth was the strongest since the second quarter of 2010.

But 2.8% was still disappointing because in recent weeks economists and Wall Street had pushed their expectations above 3% to as high as 3.5% for the quarter.

The real problem with this number is where the growth came from and what that forecasts for the first quarter of 2012. Read more

Fed surprise as central bank says it will keep rates exceptionally low through end of 2014

Actually something of a surprise from the Federal Reserve’s Open Market Committee today.

The committee decided to keep its target rate for short-term interest rates at 0% to 0.25%.

No surprise there.

But then it said it anticipated keeping rates at that exceptionally low level through at least late 2014. Previously the Fed had said “though mid-2013.” Read more

Don’t fight the Fed. It’s an important piece of Wall Street wisdom built on the often-repeated power of changes in the Federal Reserve’s policies on interest rates and the money supply to overwhelm all other financial market trends. When interest rates are headed down and the money supply is headed up,  most of the time, stocks will head up too.

Not always, of course, since the Fed itself can get overwhelmed by a global financial crisis here or a euro debt crisis there that can lead to a situation where the real economy doesn’t respond to the Fed’s monetary prodding.

But the saying is true frequently enough so that aligning your investment strategy with Federal Reserve policy makes sense most of the time.

So what about when it isn’t just the Federal Reserve that’s lowering interest rates and pumping money into U.S. economy, but the European Central Bank pursuing the same course in Europe, and the Banco Central do Brasil in Brazil, and, just beginning but accelerating, the People’s Bank of China in China?

Is this flood of cash enough, by itself, to push stocks higher in 2012—no matter what the real global economy is doing? Traders and investors have started 2012 by answering that question with an emphatic Yes. January’s rally in U.S., European, and emerging market stocks is based on a belief that the huge wave of cash that the world’s central banks have unleashed—or are about to unleash—on global economies will send stock markets higher and set economies to growing faster.

Let me give you two reasons why the global version of Don’t fight the Fed won’t work out quite as well as the current optimism suggests this time around. Read more

Maybe you think the “solutions” to the euro debt crisis being pursued by German Chancellor Angela Merkel and European Central Bank President Mario Draghi are totally wrong. Maybe you can’t imagine that these two leaders are seriously proposing to condemn the EuroZone to a year of recession followed by more chaos and, at best, slow growth again in 2013 and 2014. Maybe you think that Merkel and Draghi will cave in under pressure rather than see Greece default and rather than watch demonstrations sweep Madrid and Rome. Maybe you can’t imagine that EuroZone leaders will cling to a “fix” that has been so thoroughly rejected by bond markets.

Okay, but I think it’s time to take Merkel and Draghi at their word. They are wedded to a plan that consists of austerity, pain, and recession—and years of it. And on the evidence there is a good chance that Merkel and Draghi can actually make their plan stick politically. The Germans are the biggest and strongest economy in the EuroZone and the German government and the Bundesbank control the cash needed for any solution.

So let’s say that Merkel and Draghi are able to execute their plan—against all opposition and against whatever personal advice you or I would offer. What then does the EuroZone and the global economy look like?

Let me sketch in the most likely scenario here. And then I’ll suggest its effects on the financial markets. Read more