A CNN poll reveals that only 27% of American adults know what the Federal Reserve’s QE program is about. The question used in the poll was in a multiple-choice format, which should have seemingly produced a higher correct response than simply asking respondents to explain QE.
Why is this disturbing? Because the majority of Americans are preparing for their retirement through their 401(k), and they are making the investment decisions in the plan without knowing fundamental or current market and economic issues. Not knowing these issues could make the difference between an enjoyable retirement, or a disastrous retirement.
Here are three things that are important to know about QE.
QE was intended to keep interest rates low and produce economic growth and reduce unemployment. To accomplish this, the Fed has been buying bonds on a regular basis which has pumped money into the economy.
Stock prices have climbed during this period as new money was introduced into the economy, and the S&P 500 is now at an all-time high. It is questionable if the market has risen due to the availability of the additional money due to QE; or if it has risen due to the otherwise natural consequences of supply and demand – in other words, is this an artificially high market due to QE?
Interest rates have risen since Bernanke announced a few weeks ago that the Fed may begin tapering of bonds they are buying. A fundamental aspect of bonds is that when interest rates go up, the value of bonds go down, and interest rates are expected to continue to rise once the Fed actually begins tapering.
Those who own stocks or bonds in their 401(k) in any combination may be in for a wild ride once the Fed announces their near-term QE strategy.