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What Fed Action Would Mean for Investors

Despite growing calls to give the economy another jolt, Federal Reserve Chairman Ben Bernanke says he’d only take new action if the outlook continues to worsen. But advisers say investors can take steps in advance to benefit from any potential stimulus.

In testimony before Congress’s Joint Economic Committee Thursday, Bernanke said the economy faces significant risks and that the Fed is “prepared to take action” if financial stresses increase. Some advisers say such moves are likely, given weak job growth in recent months combined with greater concerns over the European economy. Earlier this week, three Fed officials said more action was needed. Depending on what, if anything, the Fed does, investors may want to capitalize, advisers say. “If they do have [more quantitative easing] it will definitely give a boost to the market,” says David Blain, chief investment officer of D.L. Blain & Co. in New Bern, N.C. “How long it will last is a different thing.”

One option is for the Fed to extend Operation Twist, a program that involves selling short-dated bonds to buy longer-term Treasurys, that is slated to end this month. An extension of the program would give longer-term bonds a boost in value. But such an impact is likely to be limited, advisers say. For instance, if the economy begins to grow at a faster pace, investors may raise their inflation expectations, which would push up yields on longer term bonds and drive down prices.

Similarly, if the Fed decides to go with a straight bond-buying program, as it did in the first two round of quantitative easing, investors holding long-term bonds would also get an immediate boost. But such programs, which involve printing more dollars, also increase inflation expectations. That could push bond values to drop soon after the program is announced if investors start to demand higher yields, says Brian Rehling, chief fixed income strategist for Wells Fargo Advisors. Instead, investors who think another round of stimulus might impact inflation could increase their allocation to gold, which tends to rise following announcements of bond-buying programs from the Fed, he says.

Since one of the Fed’s goals is also to keep mortgage rates low to boost the housing market, there is a chance a program could involve the purchase of mortgage bonds, advisers say. These bonds would then rise in value, says Rehling, who upped his clients’ allocation of agency-backed mortgage bonds to 15% of their bond portfolios from 12% at the beginning of the year. And even if the Fed doesn’t purchase more mortgage bonds, investors can take advantage of yields above those offered by Treasurys, he says.

To be sure, many investing pros say Fed action is by no means guaranteed. Bernanke says weaker job growth in recent months may be partly due to unusually warm winter weather pushing hiring up earlier into the year. And while the 69,000 jobs added in May was the smallest monthly increase in a year, officials typically like to see such lackluster growth persist for several months before they decide to act, says Anthony Valeri, fixed income strategist for LPL Financial. “The jury is still out,” he says.

Whatever the Fed decides to do, any action is likely to make people feel more at ease with taking risk, experts say, and stocks are likely to get a boost. Rehling says investors can determine how much more they want to add to their equity portfolios and increase their allocation steadily over the next several months. But some advisers are more bearish. Blain, who cut his clients’ equity allocation on average to 55% from 70% at the start of the year, says investors should wait for consistent improvement in the job market and more positive news out of Europe before buying more stocks.

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    • Stro,

      No offense, but what are you saying?

    • Расгорячились, вспотели. Он уже не просто пищит, он умоляет дать ему напудриться! Ни-ког-да! Точней, не сейчас. Дрочу мягко, неспешно. Принимаюсь растирать затопленную в смазке головку в руках как палочку-огнедобывалочку. Пищит! Член начал дёргаться. Снова стоп. Смазкой стрельнуло прямо-таки мне в лицо. Но макияжа нет – во время обжала мошонку. Дальше снова она в моём внимании.

    • Большие взрывы. Оценка всего этого многообразия параметров происходит моментально. На основе нее мозг, зачастую бессознательно, выдает результат, принимает «решение» – стоит или нет отвечать на действующий эротический стимул, «быть или не быть» сексуальному возбуждению. Это решение как бы переключает тумблер в нужную позицию.

    • Nope, Bernanke won’t print inflation/Gambling money for his Prime Dealer Bankers. GoldmanSachs and JPMorgan want Obama to win. Bernanke has been ordered by the Bankers to bring Gas prices down, around $2.5/gallon. Americans will vote for Obama is gas is cheap. So, for now, Bernanke will be holding of on stimulating his Banker over-lords :)

    • Ok, that should be the “recession of 1927″

      Greg

      I thought I proof-read it better

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