- Bernanke said the Fed rates are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.
- In addition, the Fed will begin a process of inflation targeting at 2% annual inflation per year.
While the push back of 0% rates to late 2014 is important, the inflation targeting was the news that shook up the market.
Let me try to put some perspective on the current investment landscape. Right now....
A 5 Year US Treasury (Federal Government) Bond Yields .89%
A decision to purchase a bond (should) be based on the real rate of return. This is the annual interest rate you get on a bond minus the rate of inflation. For example, if the cost of living rises by 2% in 2012 and your 5 year government bond returns .89%, you have lost 1.11% in purchasing power this year. .89% - 2% = -1.11%
Bernanke is telling investors holding a 5 Year Government Bond that is going to make it his goal, his life's purpose, to make them lose 1.11% in total return.
This is known as "financial repression," a topic I will soon be covering in great detail now that this inflation targeting has been announced.
All it takes is a very, very, very small portion of the enormous US government bond market to do this math and invest "somewhere else," like gold, which rocket-launched back above $1,700 in trading this afternoon.