So you may have heard that the U.S. Federal Reserve printed $600 billion in new currency last week to help get the economy moving again. Sure, it’s a lot of money, and some are worried that it’s going to cause the dollar to lose some of its value against other currencies such as the euro, not to mention increasing the potential for inflation to skyrocket. But a more important question is: how can you get a chunk of that money?
Well, you may have gotten some already. Stocks surged about 10 percent when the market got wind of the Fed’s latest money spree and when chairman Ben Bernanke hinted at the end of August that more Fed help might be coming. That’s because investors believed that the newly available cash will encourage companies to expand and make more profit. That optimism has led the Dow Jones industrial average to its highest level—above 11,400—since the start of the financial crisis in September 2008.
So if you own stocks or mutual funds that have done particularly well over the past few months, you may have the Fed to thank (it can use all the love it can get these days).
The rise in stock prices was no coincidence. In an editorial in The Washington Post justifying the new cash injection, Bernanke wrote that “higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.” The statement raised some eyebrows. It was the first time the Fed has admitted to trying to push stock prices. “It’s this dirty little secret, but Bernanke just came out and owned up to it,” says Max Bublitz, chief strategist at investment firm SCM Advisors.
Will stocks continue to rise more as the money circulates? “As stocks go up, people’s balance sheets start to look better, and then they go out and spend more,” says Bublitz. And that effect could push stocks up even further.
But there is a downside to all this. Sal Guatieri, senior economist at BMO Capital Markets, says that so much new money could cause the dollar to fall further against the euro. “That means the price of imports is going to soar and consumers are going to lose purchasing power,” says Guatieri. So you may end up with a healthier 401(k), but also a more expensive trip to WalMart.
Sadly, the Fed dollars aren’t likely to help the housing market much, at least not in the short term, says Guatieri. Banks are only starting to get past their hangover from the housing-bubble pop in 2008, and are not yet back in a lending mood.
Since Bernanke’s August statement, the long-term-lending rate has moved only slightly. And prospective home buyers remain as reluctant as ever to spend. “People want to see less unemployment before they make the most serious purchase of their life,” says Guatieri.