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Fed is not responsible for the stock market…don’t be complacent

Many investors are brushing off concern because they believe that the Federal Reserve will keep interest rates low to further stimulate stock prices.

Just to clarify…the Federal Reserve is not responsible for the performance of the stock market.  The Fed’s objectives enacted by a statute of Congress are:

  • Stable prices
  • Moderate long term interest rates
  • Maximum employment

These targets are very arbitrary [not to mention misguided], they are grossly dependent on the interpretation of: stable, moderate, & maximum.

Regardless, I have a more cynical view- the Fed only cares about the solvency and profitability of its member banks.  Period.

So don’t delude yourself into believing that the Fed will prop up the stock market [if it’s not in their best interests].

Since the Great Recession, the Fed has expanded its balance sheet [i.e. printed money] nearly $4.5 trillion.  That’s about the entire market capitalization of the Dow Jones Industrial Average…the 30 largest blue chip stocks in America…money created out of thin air.

In my opinion, this was done to recapitalize the banking system…to cover for the immense bad loans made on real estate mortgages.  After all the money printing and the corresponding re-inflation of the housing market, 17% of mortgages are still underwater.  [The effective negative equity rate is even higher at nearly 35%.]

TRUE…the Fed’s Quantitative Easing and low interest rate policy generously contributed to the uptrend in the stock market.  BUT…the rise in equities was a consequence of the Fed’s actions, NOT its purpose.  Remember, the Fed’s agenda was to re-capitalize the banks.

The Fed had no remorse in destroying the income of savers, the loss of interest income has devastated both individual citizens as well as institutions like insurance companies.  [In the 90’s, $1 million generated a risk free US Treasury income of nearly twice the average household income, today it generates less than half of the average household income.]

If the Fed had no regard for savers, why would they care about stock speculators?

Fed Chair Janet Yellen has already set the stage to deflect a stock market correction.   In July she publically stated, “Equity valuations of smaller firms as well as social media and biotechnology firms appear to be stretched…”  TRANSLATION- if the market corrects it’s not the Fed’s fault, I warned you.

Be cautious.  The Fed will end its QE3 program next month.