The Stock Market: This is the Federal Reserve

John M. Mason profile picture

Samuel Corum

The stock market does.

It’s all about the Federal Reserve.

The stock market does.

It’s all about the Federal Reserve.

Unfortunately, the Federal Reserve seems to be dominating everything the stock market does these days.

This past Friday…

we found that the labor market added 528,000 new jobs in July, double what economists had forecast…

and, the unemployment rate fell to 3.5 percent, remaining near the lowest level in several decades.

And, the basic response from investors?

Well, these numbers, investors thought, will lead the Federal Reserve to stick with its current efforts to tighten monetary policy and not “back off” on tightening as soon as many investors expected them to “back off” .

As Akane Otani and Caitlin Ostroff write in the Wall Street Journal,

“Investors had come to widely believe that the Fed could pivot to cut interest rates as early as the first half of 2023, given signs of cooling activity across the economy.”

“That would have been a balm for markets, which have tumbled this year as the Fed has quickly raised interest rates to combat stubbornly high inflation.”

“Buy Friday data showed the labor market was doing anything but cooling.”

And so here you are.

It’s all about the Federal Reserve!

This is the problem

When the Federal Reserve comes to dominate the headlines, that’s the problem.

I’ve been writing about this for weeks.

Central bank actions should not dominate discussions of market performance.

When this happens, one can only conclude that the Federal Reserve has handled things very badly, and now, everything seems to depend on what the Federal Reserve will do.

I would strongly say that this is where we are now.

Jerome Powell and his colleagues have managed things so that all future events depend on what they do.

Or at least that’s what the investment community believes.

Started under Ben Bernanke

This reign of the Federal Reserve began when Ben Bernanke was the chairman of the Fed’s Board of Governors.

Mr. Bernanke argued in the time after the Great Recession, which dates from December 2007 to June 2009, that the Fed had to create an increase in the stock market to create a wealth effect that would allow consumers to spend more quickly.

And that is exactly what Mr. Bernanke and the Federal Reserve.

But that’s what the Federal Reserve kept doing…stimulating the stock market.

The economic recovery that lasted from July 2009 to February 2020, the longest expansion on record since World War II, saw a stock market that depended heavily on what the Federal Reserve was doing.

The Federal Reserve, during this time period, pursued a policy of “credit inflation,” a policy that led to an increase in asset prices, but not consumer prices.

As a result, the stock market thrived and achieved one new historic market after another.

This continued during the Covid-19 recession, from February 2020 to April 2020, where the Federal Reserve pumped trillions of dollars of new liquidity into the financial system.

After this recession, given the generosity of the Fed, the stock market continued to reach new all-time highs.

The Standard & Poor’s 500 stock index hit its latest “new all-time high” on January 3, 2022, at 4,796.56.

Since then, investors have been trying to figure out exactly what the Federal Reserve would do and when those things would happen.

The point, however, is that during all this time since 2009 the stock market has been almost entirely under the control of Federal Reserve policy.

And the Federal Reserve, beginning with the leadership of Ben Bernanke, acted to dominate what the stock market was doing.

Of course, Fed policy produced an almost continuously growing economy, albeit at a slower rate than in other post-World War II recoveries, a growing economy with low consumer price rates rising and an economy growing with rising asset prices.

Wealth increased tremendously during this particular time period.

The Fed

But as a result of this behavior, investors in the stock market became very dependent on the Federal Reserve.

Many analysts began referring to the Fed as “put.”

The Fed’s “put” had to do with the Federal Reserve’s action to stop or limit any fall the stock market might make.

And that’s what investors are looking for right now.

When will the Fed exercise its “put” function?

When will the Fed stop the stock market crash?

This is what I mean by the Fed coming to dominate the headlines. The investment community seems to bet most of its chips on what the Fed will do next.

But, this is a problem.

The world is dominated by uncertainty right now, radical uncertainty.

The Fed knows little more about the future than we do.

The list just begins.

What will happen in Ukraine? What will happen to the supply chain problem? What is happening with the labor market and the changes taking place in it? What will happen to England and its 13% inflation? What will happen to China and Taiwan?

We don’t know what will happen with all the debt that has been created over the last couple of years and the debt markets that seem so disjointed these days.

And so on and so forth.

Finally, I have to say that I have little or no idea what Mr. Powell in the next six months, next month, next week, tomorrow or today.

What does this say about where the stock market is going?


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About the Author: Chaz Cutler

My name is Chasity. I love to follow the stock market and financial news!