For a while, the Fed has been implementing a buy back program to help bolster the sagging economy. Their plan has been to repurchase bonds in the sum of 85 billion dollars per month. Their aim is to help keep the cost of borrowing money lower than it has been. Part of this is the recognition that when the cost of borrowing money for small, medium, and larger business remains low, these businesses invest in the process that stimulate economic growth. We can see that as the creation of jobs, of good, and of services, which are then purchased by consumers. This is the Feds plan in its simplest form.
Part of the reasoning behind the Feds plan has to do with the enormous political and economic struggle that continues between the President, The Democrats, and The Republicans. Sequester cuts have the potential to do a lot of damage to the economy. While the plan from the Fed seemed to be moving in the right direction regarding monetary lending, it appears now that due to budget issues on the national level that the Fed will be reducing its buy-back dollar amount. Expectations for the Fed Program were estimated to be 1 Trillion dollars, but the current spend rate is putting future purchase far short of the 1 Trillion dollar mark. That short fall is causing unease to grow within investment and development communities.
Worry over the poor performance from Q1, which saw economic growth of 2.5 percent, but that growth fell short of the estimates that had been predicted by economists. So if, we add up the less than stellar growth from Q1, and the shortfall of buy-back from the Fed in Q2, we can see why analysts are already not impressed with the likely outcome of Q2.
Despite gains within the Real Estate market, other signs and symptoms of a sagging economy remain. US factory reports for April remained pretty much a flat line, and the job market saw less than 90,000 jobs created in March. Yet inflation rose by just 1.0 percent, which marks historical inflation as the lowest rise in over three years.
Doing the Math
The current Federal Prime Lending Rate remains at 3.25 percent for May 1, 2013. So there is an incentive to borrow money. The problem is that companies are willing to borrow money as they trade debt for equity. Many corporations are buying back their own shares. They are borrowing money to remove shares from the investment pool. The idea behind the Feds buy-back of bonds was to stimulate job growth by lowering the costs associated with borrowing money. While the Feds plan is working, it is not working to create jobs.
Picture This: A stock sells for $10 a share and the corporation receives money from the sale of stock. Then the stock drops in values to $2 a share and corporation borrows money and begins to buy back the stocks that it sold for $10 a share, but now they are only paying $2 a share. As they buy back their own stock, the value of the stock should rise. So what happens again if their stock reaches $10 a share? Rather than investing in expansion, or technology that creates jobs, corporations are using the low-interest rates to create profit. It just doesn’t seem like the plan is working out the way the Feds had hoped it would. Their plan is creating wealth, but not in the sectors where wealth needed to accumulate.