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Wednesday, June 22, 2011

What Happens Next...

What Happens Next... by Norm Arychuk, Debt Capital Markets (Toronto)

Today the U.S. central bank said that it would complete the planned purchase of $600 billion in Treasury securities next week as scheduled, and then suspend its economic rescue campaign. This action will leave in place the aid it has already committed; however, it will do nothing more for now to boost growth and spur the needed economic recovery.

The Fed will maintain its commitment to hold the benchmark interest rate near zero for an extended period of time, whatever that means – at least for the next two meetings, probably out as long as November. Relying on employment growth to occur organically to pull the economy along is the stated goal of the Fed. With the housing market generally continuing to spiral downward in the U.S., there appears to be a disconnect between anticipated increased employment and the housing market.

With the Fed not participating with a QE 2.5 or 3.0, will the lack of further government stimulus drive up bond yields to satisfy requirements of investors, thus causing an unwanted increase in all interest rates and further pressuring the recovery? Or will we see the market continue to take a flight to quality that has evolved to a large degree from the countries that cannot seem to get their financial houses in order.

My best guess is that we are in for a prolonged period of low interest rates.

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