Is September when the Music Dies?
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Jonathan Yates
Is September when the Music Dies?

Many members of the Federal Reserve have been in the media in recent weeks stating that Quantitative Easing III, the program of buying $85 billion in securities each month to keep interest rates low, would be ending soon.  Federal Reserve Governor Jeremy Stein stated that the Federal Reserve would not be a prisoner of the markets, which is why Quantitative Easing III would end, not matter what happened to stocks and bonds.  In a Wall Street Journal article today, Martin Feldstein, former Chairman of the Council of Economic Advisers for the President of the United States called for ending Quantitative Easing III soon.

Now a professor at Harvard University, Feldstein called for the Federal Reserve to end quantitative easing as the bond buying was losing its effectiveness.  The opinion piece in the Journal also stated that it was warping the activity in the financial markets, favoring speculators over savers.  This increases leverage, which results in more risk.  He also pointed out that it was damaging pension projections.

The rounds of quantitative easing have led to an increase of the balance sheet of the Federal Reserve from $700 billion in 2007 to well over $3 trillion today.  Eventually, equilibrium will have to be restored to the balance sheet of the Federal Reserve.  Common sense dictates that if the acquiring of over $3 trillion in securities by the Federal Reserve took interest rates lower, then dispensing of them will have the opposite effect.

That has certainly been the result in recent market action, as seen by the chart below.  Interest rates are higher.  As a result, the Dow Jones Industrial Average is lower.  Interest rate sensitive stocks such as utilities and real estate investment trusts have been very hard hit.  Stocks paying dividends have fallen as investors are fleeing to Treasury Bonds, which now have higher yields.


This is a good chance for investors to loan up on dividend paying stocks.  As Warren Buffett has often stated, “…be greedy when others are fearful, and fearful when others are greedy.”  In another article on this site, the case was made for the long term appeal of stocks that pay dividends.   Should these stocks continue to plunge, investors should load up for the long term appreciation and income.


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