Asset prices vs real economy

‘In the Fed we trust’ says asset prices. ‘In the Fed we mistrust’ is what the US economy and main street should say. With a 2 yr yield already at record lows and long term rates at near historically low levels, economically speaking the Fed is out of bullets in impacting the real economy while more money printing and/or continuation of cheap money will certainly help to lift asset prices and create an illusion that things are better. In terms of the possibility the Fed buys more MBS/Treasuries with the proceeds from the maturation of existing holdings, the impact will be modest as estimates have $200b of securities maturing in ’11 in the context of a $2.3T balance sheet. Helping to lift the market Friday was the FHA release of details of their plan in March to help homeowners refinance who have homes worth less than the mortgage. Lenders however must agree and FHA estimates that about 500k-1.5mm may be helped out of the 12mm who are underwater.

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