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Kimberly Amadeo

Fed Ends QE2 But Won't Raise Rates — Gold Soars

By April 27, 2011

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Federal Reserve Chairman Ben Bernanke's first press conference sent gold prices to a new record of $1,520.29 an ounce, as investors felt the Fed is not doing enough to ward off inflation.  Gold bugs liked that the Fed will end  QE2, its $600-billion Treasury buying program, on schedule in June.  But, they were alarmed that Bernanke said high oil prices are temporary, and don't signal the beginning of inflation. They also did not like that the Fed doesn't intend to raise the Fed funds rate this year.

By ending QE2, the Fed won't add to its current record-high, $2 trillion holdings of Treasuries and mortgage-backed securities. The Fed started taking mortgage-backed securities as collateral from banks in December 2008 to prevent further panic about who would hold the toxic debt. (See Federal Intervention in the Banking Crisis)

However, the Fed won't decrease its holdings, either. As these mortgages come due, the Fed will keep buying enough of them to maintain the $2 trillion level. When the Fed stops buying, it means it's pumping less liquidity into the economy (what people refer to as "printing money").  Bernanke said he will stop this expansionary monetary policy only when job growth accelerates and the economy is strong enough to sustain contractionary monetary policy.

What It Means to You

Gold prices soared to a record $1,530 an ounce in reaction to the news. Why? Investors see the continuation of expansionary policy as putting downward pressure on the dollar. They also see Bernanke's lack of concern about oil prices as a catalyst for higher inflation expectations. These investors see gold as a good hedge against a weak dollar and inflation.

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Photo: Federal Reserve Chairman Ben Bernanke (Credit: Getty Images)

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