Fed report juices stocks, gold; QE3 back in play?

According to a Wall Street Journal report, Federal Reserve officials are considering a new type of bond buying program. In this program the Fed would print new money to buy long-term mortgage or Treasury bonds.

March 7, 2012, 12:21 PM
Laura Mandaro
Market Watch

Stocks and commodities got a jolt of adrenaline in midmorning trade Wednesday after The Wall Street Journal reported Federal Reserve officials were considering a new type of bond-buying program to subdue worries about future inflation. The article, by reporter Jon Hilsenrath, said the Fed would print new money to buy long-term mortgage or Treasury bonds but effectively tie up that money by borrowing it back for short periods at low rates.

“The story itself is prudent planning on the part of the Fed,” said Dan Greenhaus, chief global strategist at BTIG LLC.

The message was: if we have to do anything else, here are the types of things we’re expecting.

But the market just heard one thing.

“All the market heard was ‘new steps,’” points out Greenhaus.

“There’s a feeling among investors that the odds of additional easing had been going down. A story like this suggests they’re still considering it,” he said by telephone.

Peter Boockvar, equity strategist at Miller Tabak, was even more blunt.

“The mad scientists at the Fed are contemplating every single possible scenario to keep longer term interest rates from moving higher,” he wrote in emailed comments.

He also attributed the market bounce to the Journal story, which he summarizes as the different things the Fed will discuss next week “to continue to keep their giant boots on the yield curve.”

Richard Gilhooly, of TD Securities, suggested the described Fed plans — if implemented — could boost the U.S. dollar and weigh on commodities, since the “operation could lower long term rates and mortgage rates, without the negative side effects of boosting commodity prices and would essentially be a curve flattener.”

But for now, investors appeared to be treating the news as an early sign of the extra liquidity that’s boosted stocks over the past three years.

The Dow Jones Industrial Average DJIA 0.61% was up 69 points at 12,827 and the S&P 500 SPX 0.69% gained 0.6% to 1,352.

Gold futures rallied 0.8% to $1685.90 an ounce. And crude-oil futures added 1.4% to $106.15 a barrel.

To see original article Market Watch

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