This coming week is a big one that we need to pay attention to. No, it is not the election. While the election will be interesting to see what happens, the real big news will be the following day when the Fed wraps up its meeting.
We can be reasonably sure that its stance on interest rates (the Fed funds rate) won’t change. The market is keeping the rate near zero. It is not really current Fed policy that is keeping it there.
The big news will be on what the Fed says about QE2 (more inflation). How specific will the Fed get? Will the Fed say exactly how much inflation it intends to create? Will the Fed say what it is going to buy (short-term bonds, long-term bonds, mortgage backed securities, etc.)?
The next question will be if the market is disappointed. We can only hope so. If the market is happy with the Fed’s announcement, we really should be prepared for some massive inflation.
There is also the X factor hanging out there. Is there anything that we’re not expecting that the Fed might announce? Will the Fed announce that it will force the banks to lend? Will it stop paying interest on excess reserves? There is always the possibility, although highly unlikely, that the Fed could announce that it will pursue a higher reserve requirement for the banks so that all of the monetary inflation it is about to create is not all pumped into the system at once. Again, it is highly unlikely, but you never know.
The elections won’t mean much to your investments. A Republican majority in the House may slow down Obama a little bit, but we will continue to see massive deficits until the Fed refuses to inflate. The more important happening this week for your investments is what Bernanke and the Fed says.