This morning, President Obama officially announced that he is reappointing Ben Bernanke for a second four-year term as chairman of the Federal Reserve.  The video below contents The President’s statement.

Does anyone have any thoughts on the reappointment?  Would you have reappointed Bernanke?  If not, who would you have chosen?

As an investor, its important to follow the actions of The Federal Reserve. Like it or not, The Fed’s policies have an enormous effect on the rates people and businesses pay to borrow money. Since credit is the life-blood of the entire economy, this directly affects the performance of most of your investments. Understanding The Fed’s actions can be confusing, so I’m going to sum up the details of the recent Fed meeting below…

What The Fed Did…

Yesterday, The Federal Reserve cut interest rates to a historic low of 0 to .25 percent.  In addition to cutting rate, The Fed stated that they would use “all available tools” to combat the economic crisis. One of these tools is a program to buy up mortgage-backed securities from Fannie Mae and Freddy Mac. In its statement, The Fed also talked about buying long-term treasury bonds.  These unexpected actions helped boost the Dow and S&P 500 by more than 5%.

What It Means…

Put simply, this statement by The Fed is telling us that they are going to implement a no-holds barred approach to getting the economy growing again.

By purchasing the mortgage-backed securities from Fannie and Freddy, Ben Bernanke is trying to force the interest rates on mortgages lower. As mortgage rates drop, new buyers have an increasing incentive to step in and buy houses.  This will also allow current home owners to refinance their existing mortgages to new ones with lower rates, saving them significant money each month.  If this program can end the housing downturn, then financial institutions can finally begin to stabilize and lead us out of recession.

The second important aspect from this Fed meeting is their statement about buying treasury securities. Currently, everyone is hording their cash and keeping it in treasuries because they are afraid to buy riskier assets.  This is keeping the interest rates on commerical debt and other loans high.  With this new policy The Fed is going to make it unprofitable to be invested in treasuries by forcing yields down and keeping them down for the near future.  As a result, investors should start moving their money out of treasuries and into riskier assets like corporate bonds and stocks.  As money moves to riskier debt securities yields will come down and as a result interest rates for businesses and consumers will decrease.

My Reaction…

Thus far the markets seem to like The Fed’s plans to jump start the economy.  I on the other hand am a little more skeptical.  We are in this difficult environment today because of the easy money Alan Greenspan’s Fed was giving out a few years ago.  Why does Ben Bernanke think the answer to our problems is to give out even easier money now?  This may solve our current problems for the time being, but something tells me we’re going to pay for doubling-down on the easy money policy eventually.  The Fed can’t keep printing money without eventually devaluing our currency.