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Fed Policy Hurts Main Street, Creates Bubble Stocks

Tickers in this article: AMZN DAL DD GD IR
NEW YORK (TheStreet) -- This afternoon we learn the status of QE3 and QE4, the latest two rounds of quantitative easing programs instituted by the Federal Reserve last September and December. QE3 is an open-ended program where the New York Federal Reserve Open Market trading desk purchases $40 billion of agency mortgage-backed securities each month. QE4 adds another $45 billion of longer-maturity Treasury notes and bonds each month.

The stated intent of these purchases is to bring down long term interest rates, not to artificially prop up the stock market. Yields are higher, not lower and thus Fed policy has failed. Instead of bringing down interest rates, cheap money has been used to speculate in the stock market resulting in the ValuEngine valuation warning. The stock market bubble includes stock specific bubbles.

The weekly chart for the Treasury 10-year yield shows that the lowest yield was 1.377% set in July 2012, before QE3 and QE4 were implemented. With a current yield of 2.616% this yield is up 123.9 basis points.

Chart Courtesy of Thomson/Reuters

What the FOMC states after its meeting ends today will likely determine whether or not the 10-year yield holds its 200-week simple moving average at 2.557%. As the chart shows, this yield fell below the 200-week in October 2007 just before the FOMC cut the federal funds rate to 4.50%. It wasn't until Dec. 16, 2008, that this rate was cut to 0.00%. This corresponded to the low 10-year yield at 2.016% shortly thereafter. Note that in each period where this yield rose, the 200-week SMA held as support in April 2010 and February through April 2011. This makes the current test extremely important as Treasury traders react to the Fed statement.

My hope is that Fed Chief Bernanke will begin to taper QE purchases before he leaves office in early 2014.

Federal Reserve policy has hurt Main Street USA in several ways.

The 0.00% federal funds rate has shut out savers on Main Street. Savers are those who do not invest in the stock market and depend upon interest on bank CDs for living expenses. Since the end of 2008, savers have had to trim the principal of their nest eggs, as there is virtually no interest income to pay for necessities.