QE2: Potential Winners and Losers
Experts say savers will be hit the hardest
As expected, the Federal Reserve will once again engage in another round of quantitative easing. In the second round, the
Fed will purchase another
Quantitative easing has come under a great deal of scrutiny over the past few months. It's considered one of the last monetary tools the Fed has left since it has already set the federal funds rate at virtually zero.
"The Fed is obviously still in the deflation camp, and that's why we're doing QE2," says
Whether the Fed accomplishes its stated goal with this plan is still up for debate, and much uncertainty remains. Here are a few potential winners and losers
In times of uncertainty, it sometimes pays to take risks. Since the downturn following the financial crisis, many investors have been wary of reinvesting their money in the stock market. Cautious investors who have chosen to sit on the sidelines in low-yielding money market accounts and other low-risk investments have missed out on a rally that stretches across a number of asset classes including stocks, bonds, and even commodities. "If the Fed succeeds, the losers on a relative basis are going to be the investors in cash," says
Hard assets (Winners).
"I think [QE2] is good for asset classes like commodities and gold, and those kind of things that are real, hard assets that would probably benefit from a more inflationary environment," Derrick says. Precious metals like gold and silver have rallied since the depths of the financial crisis. Some investors, like Derrick, view gold as a type of currency that will perform well when investors lose faith in paper currencies and look for a safe haven. Both metals have reached historic highs in recent weeks. Year-to-date, SPDR Gold Shares ETF (GLD) is up 23 percent, while ETFS Physical Silver Shares ETF (SIVR) is up 47 percent.
After Fed Chair
Experts have long said that quantitative easing punishes savers for their good behavior. "The people that have been hurt the most in this crisis have been the savers -- the prudent people who put money away," Derrick says. "From a saver's perspective, I really don't see that much relief in sight." The Fed's goal is to keep rates low, which has consequences for income-hungry investors. The yield on the 10-year treasury note has hovered around 2.5 percent for most of the latter half of 2010. Historically, rates have been much higher. In mid-2007, when economic growth was much more robust and demand for treasuries was much lower, 10-year treasuries were yielding as much as 5 percent. Many older investors and retirees depend on the income they receive from their investments in high-quality bonds like treasuries.
The dollar (Loser).
More quantitative easing by the Federal Reserve means more dollars will be printed. The worry for many U.S. investors is the future of the greenback, as more dollars (actually, bank reserves) in circulation dilutes the currency's value. "The Fed has basically cut interest rates to zero and this is basically the last thing they can do," says
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QE2: Potential Winners and Losers
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