Today, Ben Bernanke cleared the air on recent doubts that the Federal Reserve would continue their pace of purchasing Treasuries (aka low interest rate policy, aka "QE3", aka "printing money") by telling a Congressional committee he believes the "benefits" of the Fed's current and third round of Quantitative Easing outweigh "the potential costs of the increased risk-taking in some financial markets."
What Ben's Words on 'QE3' Means for You, the Market, and the Economy
In translation, Ben wants to keep interest rates low through 2013 because it has shown results in stimulating the economy. Look no further for evidence than today's report that 2012's home-price gain was the best in seven years. Low interest rates make home more affordable, which stimulates sales, which stimulates further buying, which supports retail outlets (Home Depot reports best earnings in 4 years).
For mutual fund owners, this means that bond prices will at least delay for a while the inevitable fall in prices. Currently most bond funds, as measured by the BarCap Aggregate Bond Index) are at about breakeven for the year while stocks, as measured by the S&P 500 Index, are up approximately 5.00% as of this writing.
Therefore, as long as inflation does not heat up anytime soon, Ben and the Fed are likely to keep up QE3, which should continue to prove supportive of stock prices, somewhat neutral for bond prices and mostly positive for home buyers and related retail outlets.
The Short-term Benefits and Long-term Costs of QE3
People who are considering buying a home or those wanting to cash in on a low-interest refinance on their mortgage will like today's news. However, those looking for reasonable interest rates or income from savings and investments are still challenged to find anything without taking significant risk. (For more on this, look at my article on Where to Invest 2013 - Fixed Income).
The big picture view is that the US economy is still puttering along at a moderately slow pace and economic challenges, such as paying off all of this debt that is created from QE 3, still must be paid for at some point. For now, just keep your portfolio balanced and try your best to pay attention to the things in life that matter much, much more than money...