Curious Calls for Help from Federal Reserve
As the stock market whips around and trims the yearly gains to zero, the talking heads are calling for the Federal Reserve to “do something.”
“Based on the World Bank’s estimate of the total market capitalization of US stocks the 2.5% gain in equities just in the States is worth about $420 to $450 billion…We knew the Fed would blink on coming up with a new QE at the slightest excuse. Peter Schiff and I discussed it openly last week. We just didn’t know their pain threshold. How bad would it have to get before the Fed stepped in? Now we do. Whether he tried to or not James Bullard has in effect signalled to traders that the FOMC is committed to jawboning the equity market anytime stocks get down 9% or more. “
So now the Fed begins to admit that it is a market “propper upper.” And here we thought it was about jobs and the economy.
Curious is the call. During the past six years, the Fed has been adamant that their attention lay with the economy and not the propping up of markets. The requests are now for the Federal Reserve to come in and quell the sell off. This points out and confirms what many have held all along.
First, it must be conceded that the Federal Reserve was “not displeased” with the meteoric rise of stock market, as was this administration. It may have merely been a side effect of attempting to assuage the employment picture, but one can only imagine it was the cause of self congratulation at some point. But now the call is for the Federal Reserve to do just what they claim they were only partially concerned with, that being supporting the stock market. Maybe this was always a high priority for the Federal Reserve, despite their rhetoric.
Second, central planners do not know all, nor can they predict all. This has been the constant warning regarding the reliances on theories and the myopic designs implemented by the mutual admiration society that heads the central banks. Who could have foreseen the Ebola problem and its potential to harm the world’s economies? Who could have predicted that ISIS would precipitate the fracture of OPEC and the plunge in oil prices? Note to the central bankers: Markets seek their own levels, eventually. To herd everyone, every money manager, into the same equity position leaves a time bomb. That is precisely the situation the Federal Reserve has intentionally or unintentionally created.
Finally, there is no way out for the Fed. They prepared the market by signaling the exit from their QE program. As they step to the door, the call from the investors is, “you can’t leave now!” The fact is Yellen is trapped in her own rhetoric. She declared she will not do anything to “harm the recovery,” yet any exit or suggestion of exit does just that.
The Federal Reserve now has all the happy buttons pushed. They need more buttons. The tools of systematic rescue have been, for six years, fully employed to keep the party going. And now that short rates are zero and the ten year bond is yielding paltry returns, where and how should the Federal Reserve act next? Perhaps a better question is should they? Supporting markets and promoting inflation, (their newly assumed duties), during a world wide hard asset break led by crude oil, and also offsetting what might be dire consequences of an epidemic, are tasks well removed from any implied monetary powers of the Federal Reserve. The crude oil market is now seeking its true price level post OPEC. The stock market is next. Markets seek the balances that central planners such as OPEC and the Fed can only postpone.