Perception Of Powell Put In Place – QE4 Looms

For better or worse, the markets perceive that Fed chairman Powell has showed his hand.

The recent Federal Open Markets Committee (FOMC) minutes of the January meeting revealed almost unanimous agreement to announce a plan soon for ending the Fed’s policy of balance sheet reduction. This is the first step in an inevitable march towards the fourth round of quantitative easing (QE4).

If any more evidence were needed pointing to the fact that Fed policy is led by the markets, this surely is the icing on the cake. Stock markets tumble in the fourth quarter and, in January, not only does the Fed signal a reversal in its interest rate path, but the FOMC members have a collective buttock clench over its policy of reducing the trillions of dollars of new money created after the financial crisis of 2008. Music to conventional analysts’ ears. The “Powell Put” is in place. From this moment on, whenever stock markets fall, the buy-the-dippers will be full of confidence thinking that the Fed will come to the rescue.

And therein lies the problem.

You see, it’s all about causality. Or more succinctly, the perception of causality. Most market participants think that the stock market rally since December has been caused by the reversal in Fed policy. Not so. It was the decline in stock markets during the fourth quarter that caused the Fed’s U-turn. FOMC members are human. They have emotions. They herd, just like the rest of us.

The Socionomic Theory of Finance noted QE’s impotence with respect to moving market prices. Chapter 2 (read an excerpt here) shows that stocks did not respond commensurately to the Fed’s quantitative easing program. And forget about commodities. In July 2008, just two months before the onset of QE, commodity prices started their biggest bear market since 1932. As the author Robert Prechter noted, “Anyone applying exogenous-cause thinking to these data would have to conclude that QE worsened the collapse in commodity prices.”

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Disclosure: Murray Gunn is Head of Research for Elliott Wave International’s Global Market Perspective, a monthly ...

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