Fed Euphoria

This morning, the major stock markets indexes are holding up very well despite French banks trading lower and a possible Greek default. The stock markets are obviously betting on another wave of inflation creation by the the Federal Reserve and the other central banks to keep the stock markets in rally mode. Tomorrow, the Federal Reserve Bank (U.S. central bank) will announce its interest rate and policy decision.

Traders and investors are expecting the Federal Reserve to implement Operation Twist tomorrow. This is when the central bank will replace short-term U.S. Treasuries in its $1.65 trillion portfolio with long term bonds. This action by the Federal Reserve may already be priced into the stock market and the long term effects should be minimal. A real surprise to the markets would be another quantitative easing program called QE-3. This would send commodities and the stock markets higher just the way it did late last year when the Federal Reserve began its $600 billion QE-2 program. That program just ended on June 30, 2011. It caused massive inflation around the world.

Many investors believe that the Federal Reserve's $600 billion QE-2 program was the cause of the food riots in the Middle East and Northern Africa last year. When the central banks create more U.S. Dollars this makes everything that people need for survival such as food, energy, and commodities more expensive.