Have Bank of America and Goldman Sachs been taken over by a bunch of Austrian economists? The Wall Street titans have learned that the Federal Reserve is instrumental in driving markets – high and low. This year has been no different. These financial institutions write that the Eccles Building has been the main catalyst for the stock market performances of the past and for the present. For Fed critics, the profound statement of “well, duh” is appropriate. But, hey, it is better late than never. There is always room to hop on the anti-central bank bandwagon, and perhaps you can thank the Trump Train for ramming through the walls of clandestine, omnipotent institutions.
It’s the Fed, Stupid!
Recently, the Bank of America published a detailed chart covering the period between 1968 and 1976, listing the Vietnam War, oil shock, the impeachment of then-President Richard Nixon, and the end of Bretton Woods. What paralleled these history-making events? Fed easing and then monetary tightening.
The chart highlighted the ups and downs of the Dow Jones Industrial Average coinciding with the movements of the US Fed Funds rate. Evidently, they mirrored each other’s ebbs and flows: The Dow followed Fed policy, much like the way it does now.
Goldman Sachs then released its modern chart that concluded the Fed has been the primary driver of financial markets in 2019. Is this a shocking analysis? Not if you have been paying attention and combing through the flood of headlines regarding Fed policy and how equities move up or down based on the Federal Open Market Committee (FOMC) voting to raise, cut, or stay. The only thing surprising is that such a huge entity would make an admission; there is no way it would have done this in 2008.
That said, the bank does not see monetary policy supporting growth any longer, writing:
“The support from monetary policy is fading … since the end of August. Initially this came alongside a sharp steepening of US yield curves and an increase in US 10-year TIPS yields — a reversal of the ‘risk off’ move in August — as ‘Global growth’ recovered at the same time. But since October ‘Monetary Policy’ has declined further, even as ‘Growth’ fell sharply at the beginning of the month.
“Near-term, it seems increasingly difficult for G3 central banks to surprise in a dovish direction without weaker growth first.”
In total, central banks’ balance sheets top $16 trillion, and they continue to rise. The Fed has tapered the tightening and is embarking upon an expansionary adventure. The Bank of Japan (BOJ) continues to be the top shareholder in the stock market. The European Central Bank (ECB) is behaving like a high school student hoping he does not get picked to answer: “An integer from 100 through 99, inclusive, is to be chosen at random. What is the probability that the number chosen will have zero as at least one digit?” Other central banks are either carving their own path in a subzero terrain or following the crowd.
All for what? The International Monetary Fund (IMF) keeps slashing its global economic growth forecasts. Well, at least everyone can claim to be a victim as the trade war wreaks havoc on markets.
This has been the year when the Fed resorted to its interventionist stupor, inebriated by the printing press ink to prop up an unsound global economy in vain. The central bank has cut interest rates, expanded the money supply, and unleashed the fourth round of quantitative easing (for the love of God, don’t call it QE!). Initially, the market reacted favorably to the easing, but not as much as either the Fed or President Donald Trump would like. The only expectation is that the Fed will fire off more bullets, attempting to save face and sacrifice long-term prosperity at the altar of Keynesian central planners.