QE2-rates go up

The phone is ringing with clients asking how low rates have gone due to the Fed's Quantitative Easing 2 (QE2). hmmm...I guess the expectation is that with the Fed buying up Treasuries everyone thought that would push prices up...and thus the yields down (rates down.) That makes sense to me, but that isn't whats happened....why you ask?

The Fed is trying to accomplish a few primary goals.

1-to push the US dollar lower. When the dollar goes down it makes our exports seem cheaper in foreign markets thus increasing our exports. If we need to export more there will be a need for more workers to fill that demand thus improving the employment troubles.

2-because of #1 above the increase in exports will also improve the stock market...as those exports become sales the bottom line of US companies will improve and thus help the stock market move higher. An improvement in the stock market typically leads consumers to feel more 'confident' and consumers spend more of their money thus further improving the economy.

These both seem to be great goals if you are living in the US, but the trouble with these actions are that they are both designed to cause the economy to heat up and lead to improved GDP. Higher growth is good for your investments and if you want a job, but the growth is inflationary and inflation is not a good thing...above 2-3%. The Fed wants some inflation, but the trouble is that it could be hard for the Fed to control the rate of inflation in the coming years...things may heat up too much and inflation will definitely lead to higher rates. How high is the question.

Think back to the late 70's when we had massive Deflation...the Fed acted to heat things up then and if you are old enough you know what happened...rates in the early 80's were in the TEENS. Lets hope this round of Fed action will help improve the economy and that the Fed recognizes improvements early and can slow the ship before its cruising toward high inflation...and high rates.

Investors are mindful of the threat of inflation and may not be buying into the Feds plan to push bonds higher and rates lower...if investors dont buy the bonds along with the Fed the idea of lower rates may be a dream of the Feds and may not materialze for homeowners. The moral of the story is that rates are low...and may not go lower. Homeowners looking to refinance should be acting now and not wait for lower rates...4% should be low enough to encourage any thoughtful homeower.