Is the Fed’s Plan Working? Look Abroad to find out

New York Times ^ | 11/29/2010 | Paul Lim

[SeekAndFind]

HOW will you know whether the Federal Reserve’s plan to reinvigorate the economy by buying Treasury debt is working?

Simple: Look at how foreign stocks are behaving. Based on their performance last week, the Fed could be running into a problem.

Although one goal of the Fed’s $600 billion monetary stimulus is to restore confidence in domestic stocks — in the hope of bolstering consumer confidence and spending here at home — the real canary in the coal mine for the central bank’s plan is the performance of overseas equities.

Why? Market strategists say they believe that the Fed’s effort, its second foray into quantitative easing, known as QE2, will have several consequences, some of them apparently unintended. For starters, by keeping market interest rates low through buying intermediate-term Treasuries, the Fed hopes to prompt risk-taking among investors.

But risk-taking doesn’t stop at America’s shores, and since anticipation of QE2 began building, investors have bid up risky emerging-market stocks more than domestic equities. Since Aug. 31, the Morgan Stanley Capital International Emerging Markets Index has surged more than 13 percent. That strong rally is a sign that the Fed’s efforts packed initial punch, because it encouraged investors to take on risk.

Low interest rates also reduce demand for the dollar, though it has been rising quite recently. Over the longer haul, a falling dollar would lower the cost of American goods sold abroad, increasing exports and, ultimately, job creation.

But a declining dollar would also “encourage U.S.-based investors to favor overseas investments,” said Jeffrey N. Kleintop, chief market strategist at LPL Financial in Boston. That’s because when the dollar sinks against other currencies, investors who put money to work abroad can profit on the currency exchange.

[teeman8r]

when will they learn that a free market system needs to be free from tampering...

ugh.

teeman