We came across the following bullet points from a Seeking Alpha article titled- The Fed is not Juicing the Stock Market.
- It makes for a great headline, but the Fed is not the cause of this rally.
- Every dollar the Fed has pumped into the economy is spoken for, and it is not in equities.
- The truth is a lot more boring and scary than the conspiracy theory.
After explaining how the Fed is not culpable for rising stock prices, the author ends the article with the following challenge: “So please, I invite anyone to explain to me, like I was a 5-year-old, what exactly is the mechanism that explains “the Fed is juicing the market,” when we know exactly where all the Fed’s money is, and we know that it isn’t in the market.”
We are always up for a challenge.
The following article describes four ways in which the Fed juices the stock market.
Draining the Asset Pool
The Fed conducts monetary policy by governing the Fed Funds Rate. To do this, they buy and sell Treasury securities via open market operations. When the Fed wants to lower rates, they buy Treasury debt. In doing so, they reduce the supply of investible debt, making remaining debt more expensive (lower yield). They most often buy or sell short term Treasury Bills to affect the short term Fed Funds rate. Open market operations also add or drain the banking system’s liquidity to help further hit their target.
More recently, with Fed Funds at zero percent, they have conducted QE or large-scale asset purchases. These operations help manipulate rates across the maturity curve and not just Fed Funds. QE, as with traditional open market operations, reduces supply, boosts prices, and lowers yields.
With knowledge of the Fed’s modus operandi, let’s go swimming…CLICK for complete article