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Why the Rally

March 28, 2012 – 5:09 pm

The Fed chairman, Bernanke, told us again that he is going to leave interest rates, at least those controlled by the Fed, at extreme lows for the foreseeable future. On Monday that gave the market a strong push up.

However, maybe investors and traders should consider the reasons for this extraordinary declaration. First, how does he know he will not increase rates and how can we rely on his statement? In fact I doubt that we can. What would the Federal Reserve do if inflation starts to spin out of control next year, or the growth in our economy takes off, which would push inflation even higher. Usually inflation comes from outsized economic growth but we have had ‘Stagflation’ where an economy does not grow or even shrinks but inflation increases. In any of those scenarios the Fed would raise rates. Still, in the current environment it appears the Fed will be on hold when it comes to raising rates.

The reason the Fed is saying they are going to maintain the low rates has to do with a poor job creation economy here in the U.S, worries over Europe’s debt that is still plaguing their economy and apparent shrinking in China’s economy. Those are pretty big concerns so why isn’t the stock market more worried?

The flood of easy money for the stock market is like food for a hungry child. The market will eat the money and it could overindulge for long stretches of time with the help of the Fed. Of course it will stop at some point but so far this year it has not even taken a break. And like a child there seems to be little worry about outside forces.

Good Trading
Steve Peasley

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