Where The Fed Points, Markets Follow

As regular readers know, I’ve been watching the Federal Reserve closely for many years.

After all, we’re in an unprecedented period in financial history. Never before have interest rates been held so low for so long in such a global fashion. It affects everything.

Here’s my primary takeaway from all my Fed-watching: The Fed has the power to juice markets higher at the press of a button (using lower interest rates and bond buying), and it has become intoxicated by that power.

Whenever the stock market declines, the Fed lowers interest rates or even buys bonds to dramatically increase liquidity and keep rates low.

One of my favorite financial analysts, Sven Henrich, recently made the case incredibly well:

In March 2009, markets bottomed on the expansion of QE1, which was introduced following the initial QE1 announcement in November 2008. Every major correction since then has been met with major central bank intervention. QE2, Twist, QE3 and so on.

When [the] market tumbled in 2015 and 2016, global central banks embarked on the largest combined intervention effort in history to the tune of over $5 trillion between 2016 and 2017, giving us a grand total of over $15 trillion in central bank balance sheets, courtesy [of the] Federal Open Market Committee, European Central Bank and Bank of Japan:

When did global central bank balance sheets peak? Early 2018. When did global markets peak? January 2018.

Well said. The only point I would add is that the Fed also fueled the housing bubble in the early 2000s. Shockingly, The New York Times economist Paul Krugman said as much in 2002, explaining:

To fight this recession the Fed needs… soaring household spending to offset moribund business investment. [So] Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

This is why people say the Fed is too powerful. A small circle of bankers, academics and politicians can essentially choose the market’s direction. And generally speaking, they like markets to go up. So interest rates trend lower and lower.

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