Blog : Penny Stocks and Easy Money

by Ed Zwirn on May 1st, 2013

Penny stock watchers take note: The Federal Reserve's Open Markets Committee, wrapping up a two-day session on Wednesday afternoon, announced that it will keep pumping money into the economy for the foreseeable future.

By an 11-to-one vote, the FOMC voted not only for the continuance of the Fed's $85 billion monthly purchases of mortgage-backed securities and Treasury bonds, but also left open the possibility it may up the ante, guaranteeing a steady stream of money to chase a limited number of assets, ranging from penny stocks to savings bonds.

"The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes," the statement read.

Today's statement painted a picture of a U.S. economy in which growth is limited and inflation likely to remain restrained, likely to run at or below the Fed's 2% objective for the "medium term."

The nation's monetary governors also took the opportunity to blame cutbacks in government spending for the slowing of economic growth, saying that household spending and business fixed investment has advanced since the last FOMC meeting in March, "but fiscal policy is restraining economic growth."

Going forward, the FOMC said it expects to use the bond purchases and "other policy tools as appropriate" until there is a substantial improvement in the labor market and that "a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens."

In addition, the Committee said it expects to keep the current federal funds rate target at between 0% and 0.25% for as long as the unemployment rate remains above 6.5% and inflation between one and two years ahead is projected to be no more than half a percentage point above the Fed's 2% target. And this will probably take a long time.

With the official unemployment rate at 7.6% for March and the core consumer price index, which excludes food and energy, up only 0.1%, the Fed has given its accommodation program a long leash before these numbers would prompt a monetary tightening, and penny stock investors and others deciding on which stocks to buy or sell should be taking note.

The message for penny stock investors is clear. Penny stocks and other assets will continue being chased by Fed money and, as the governments of the world continue to move toward cutting spending and their central banks move to counteract this, the prospect of any tightening on the part of the Fed is as remote as it can be. Whether or not this round of monetary accommodation will be sufficient to support the continued rise in everything from penny stocks to blue chips remains to be seen. But with interest rates remaining low, penny stocks and other high yield/high risk investments should continue to do well as long as the economy remains sound and investor hunger for big returns continues.