What Fed Action Would Mean for Investors

Despite growing calls to give the economy another jolt, Federal Reserve Chairman Ben Bernanke says he’d only take new action if the outlook continues to worsen. But advisers say investors can take steps in advance to benefit from any potential stimulus.

In testimony before Congress’s Joint Economic Committee Thursday, Bernanke said the economy faces significant risks and that the Fed is “prepared to take action” if financial stresses increase. Some advisers say such moves are likely, given weak job growth in recent months combined with greater concerns over the European economy. Earlier this week, three Fed officials said more action was needed. Depending on what, if anything, the Fed does, investors may want to capitalize, advisers say. “If they do have [more quantitative easing] it will definitely give a boost to the market,” says David Blain, chief investment officer of D.L. Blain & Co. in New Bern, N.C. “How long it will last is a different thing.”

One option is for the Fed to extend Operation Twist, a program that involves selling short-dated bonds to buy longer-term Treasurys, that is slated to end this month. An extension of the program would give longer-term bonds a boost in value. But such an impact is likely to be limited, advisers say. For instance, if the economy begins to grow at a faster pace, investors may raise their inflation expectations, which would push up yields on longer term bonds and drive down prices. Continue Reading…