That's why investors should prepare ahead of time.
Of course, there's no way to predict exactly what U.S. Federal Reserve Chairman Ben S. Bernanke will do, but 20 years of experience in global markets suggest he's considering five alternatives drawn from a rapidly diminishing menu of options:
- Eliminate interest paid on reserves.
- Sell short-term securities while buying longer-term debt.
- Target actual inflation.
- Buy more assets outright in a program that would be somewhat like the $600 billion worth of Treasuries it bought as part of QE2.
- And, finally, it could just do nothing.
Let's look at the Fed's options first.
Option #1First, the Fed could eliminate interest paid on reserves. Banks would hate this, but it would go a long way towards encouraging lending.
Banks right now are borrowing at extremely low rates, building up huge cash stockpiles and investing the spread. By doing this, the banks are earning more than they would from even their best customers at a fraction of the risk.
Customers have become almost irrelevant as a result, which is something our leaders cannot seem to grasp. So while they're ostensibly all about helping Main Street, they're really just selling out to Wall Street.
We have to get the money to the consumer where it can be used to create wealth.