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The Street Expects Bernanke To Accommodate

This afternoon the Federal Reserve Banks will make it's policy announcement on the fed funds rate(overnight lending rate to the large major banks) and the amount of quantitative easing(money printing) that the central bank will do in the coming months to inflate the stock market. This is the most highly anticipated FOMC meeting since the financial crisis in late 2008 and early 2009.

This meeting is somewhat like an earnings release. Often when a company announces its earnings there is a whisper number that the stock market investors look for the company to reach and a number that the analysts survey and expect the company to reach. Often when a stock has already made a sharp move higher prior to the earnings announcement the market has already priced in the good news. Therefore, the company that is reporting the earnings will really have to surprise the upside or report much better than expected earnings and guidance or say the future will be even better. If the company fails to report that way or under delivers the stock will usually sell off as the market no longer sees further upside potential. Remember the stock market is forward looking by three to six months and sometimes more.

In other words the Federal Reserve Bank will really need to deliver and say that they will continue to inflate the stock markets regardless of what the current quantitative program is. Many investors are expecting a $1 trillion QE-2 announcement. However, recently the Federal Reserve Bank has leaked out that they will only do a $500 billion QE-2 program. Is the central bank sandbagging the street the same way companies such as Apple Inc.(NYSE:AAPL) and others always do? In December 2008, the Federal Bank Chairman wasted no time at all by lowering the fed funds rate down to zero percent. Therefore, the Federal Reserve Bank Chairman Ben Bernanke rarely wants to disappoint Wall Street and his friends.

What is the play on a positive reaction to the QE-2 announcement? The play in the short term should the market react positive to the quantitative easing or money printing announcement will likely be a move higher in gold and silver. Anytime the U.S. Dollar Index declines gold has been a definite beneficiary to the falling U.S. Dollar. When the U.S. Dollar Index declines the stock market inflates and this is usually lead by commodities.

What is the play should the quantitative easing(money printing) plan under deliver or fail to meet expectations? Then the announcement by the Fed could turn out to be a 'sell the news' type of event. Therefore, the U.S. Dollar Index could bounce higher. Should this happen or occur yields could spike or at least rise as U.S. Treasuries sell off and decline. These are the two likely scenarios that may occur. We shall see soon enough.