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Is our entire stock market essentially dependent on the FED?
I think the one lesson I am learning is that the FED is the only institution propping up US equities.
Where would this market be if the FED hadn't caved in and changed their tune a few weeks back?
The Fed PUT is a powerful tool. Perception is everything, and right now we can go back to inflated Asset prices because it looks LIKELY that the Fed has got our back again.
Re: Is our entire stock market essentially dependent on the FED?
Sometimes it feels that way. But only if you’re very short sighted. The Fed can sometimes precipitate or delay the onset of recession (and the accompanying market losses) through monetary policy. But, over a decade or longer their influence from setting overnight lending rates is much less. Who knows why stocks do what they do day-to-day? Expectations of future Fed policy enter the picture, but IMHO, are but one ingredient.
Some well known market observers have been making the case that the enormous monetary stimulus created after the 2007-09 recession by central banks around the globe has caused an unsustainable asset bubble which must deflate one of these days. They cite not only excessively low interest rates (0 in some countries) over that period, but also the massive bond buying campaign our Federal Reserve engaged in. The Federal Reserve is now in the process of “unwinding” stimulus by selling their bonds in the open market. That process has been ongoing since late 2017. This “unwinding” is the part of the equation often overlooked in discussions of Fed policy.
This explains the Fed’s bond buying / selling process and rationale behind it:
“If the Fed buys bonds in the open market, it increases the money supply in the economy by swapping out bonds in exchange for cash to the general public. Conversely, if the Fed sells bonds, it decreases the money supply by removing cash from the economy in exchange for bonds. Therefore, OMO has a direct effect on money supply. OMO also affects interest rates because if the Fed buys bonds, prices are pushed higher and interest rates decrease; if the Fed sells bonds, it pushes prices down and rates increase.”https://www.investopedia.com/articles/economics/08/monetary-policy-recession.asp
Added: Since posting I have become aware of an article in Friday’s WSJ suggesting that the Fed is considering halting their bond selling earlier than planned. No doubt, some of Friday’s market rally was related to the story. WSJ: "Federal Reserve officials are close to deciding they will maintain a larger portfolio of Treasury securities, putting an end to its portfolio wind-down closer into sight."
Comments
Sometimes it feels that way. But only if you’re very short sighted. The Fed can sometimes precipitate or delay the onset of recession (and the accompanying market losses) through monetary policy. But, over a decade or longer their influence from setting overnight lending rates is much less. Who knows why stocks do what they do day-to-day? Expectations of future Fed policy enter the picture, but IMHO, are but one ingredient.
Some well known market observers have been making the case that the enormous monetary stimulus created after the 2007-09 recession by central banks around the globe has caused an unsustainable asset bubble which must deflate one of these days. They cite not only excessively low interest rates (0 in some countries) over that period, but also the massive bond buying campaign our Federal Reserve engaged in. The Federal Reserve is now in the process of “unwinding” stimulus by selling their bonds in the open market. That process has been ongoing since late 2017. This “unwinding” is the part of the equation often overlooked in discussions of Fed policy.
This explains the Fed’s bond buying / selling process and rationale behind it:
“If the Fed buys bonds in the open market, it increases the money supply in the economy by swapping out bonds in exchange for cash to the general public. Conversely, if the Fed sells bonds, it decreases the money supply by removing cash from the economy in exchange for bonds. Therefore, OMO has a direct effect on money supply. OMO also affects interest rates because if the Fed buys bonds, prices are pushed higher and interest rates decrease; if the Fed sells bonds, it pushes prices down and rates increase.” https://www.investopedia.com/articles/economics/08/monetary-policy-recession.asp
Added: Since posting I have become aware of an article in Friday’s WSJ suggesting that the Fed is considering halting their bond selling earlier than planned. No doubt, some of Friday’s market rally was related to the story.
WSJ: "Federal Reserve officials are close to deciding they will maintain a larger portfolio of Treasury securities, putting an end to its portfolio wind-down closer into sight."
You may need to get around a paywall or find a summery of story elsewhere to read beyond the headline. https://www.wsj.com/articles/fed-officials-weigh-earlier-than-expected-end-to-bond-portfolio-runoff-11548412201