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Watch (don’t fight) the Fed

Investors should pay attention to the Federal Reserve as it influences interest rates to try to control economic growth, Bob Landaas says in a Money Talk Video. Here is a transcript of the video.

One of the biggest unknowns right now for stock market investors in the United States is what the Fed will do with their stimulus spending.

We went through quantitative easing Number 1, Number 2 and now we’re into QE3, and recently the Fed created all sorts of turmoil in the United States and Japan when they said that they were within perhaps just a few months – in quoting the chairman – of starting to unwind Fed stimulus.

One of the first things I learned as a stock investor is to not fight the Fed. So if the Fed is accommodating, you want to be in the stock market. And generally, that’s worked to my advantage over the years.

So the point is when the Fed becomes less accommodative, you want to be a little bit cautious.

Now, none of us know, because of the size and the scope of Fed easing, what it’ll be like in the financial markets when they take their proverbial foot off the gas pedal.

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Our best estimate is that the Fed will start reducing their quantitative easing in buying $85 billion worth of long-dated Treasuries. They’ll start reducing the dollar amount per month, perhaps into the fall maybe even into next winter. And of course, what you hope for is that the economy is growing enough on its own without the benefit of Fed easing.

So I think it’s important for investors to maintain a focus on what the Federal Reserve is doing. Chairman Bernanke has been fairly transparent with his viewpoints. They release the minutes much quicker than they used to. His testimony in front of Congress twice a year now is widely followed.

And I’ve been a big fan of the Fed stimulus up until now. It has lowered interest rates. It has helped the economy at a time when the government’s not doing their job to help stimulate the economy. But at some point the Fed will have to reduce their stimulus, and at that point in time, the economy is going to have to stand on its own two feet.

And the expression on the street is “what happens when you take the proverbial punch bowl away from the party?” We think it’ll happen later this year, perhaps into next year, and when it does, it’s going to be all about interest rates and earnings at that point in time, because we won’t be able to rely upon the Fed as we have for the better part of the last four years.

Bob Landaas is president of Landaas & Company.

Money Talk Video by Peter May
(initially posted June 7, 2013)

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