Interpreting Middle East Economic News and Analyzing Market Trends

Is the Fed losing control of the market?

QE3 - 2012 to 2013

Chart Source: Yahoo!


The saying goes ‘never bet against the Fed.’  The U.S. Federal Reserve’s nearly endless resources deter even the most seasoned investors from going against it.  What the Fed wants, the Fed gets… or so we are to believe…


The Fed may be larger than any other investor out there, but it’s not as large as the market.  From the chart above, we can clearly see that the market is in control and not the Fed.  Since the announcement of the third round of Quantitative Easing (QE3) on September 13, 2012, U.S. government bond yields have been rising.  They have nearly doubled since QE3’s announcement last year.


If the Fed’s objective was to lower yields, then it has failed.


September 13, 2012:

Noting continued weakness of the overall U.S. economy, Federal Reserve chairman Ben Bernanke announced Thursday the Fed would launch a third round of so-called quantitative easing, or QE3 — an aggressive bond-buying program designed to lower long-term interest rates in the hopes of stimulating economic activity and reducing unemployment.

The Fed said it will spend $40 billion a month purchasing mortgage debt through the end of the year, and left open the possibility of continuing the program until conditions improve. Additionally, it will continue its bond purchases as well as push back its deadline for raising short-term interest rates from 2014 to 2015 — another way the Fed’s attempted to spur growth through more borrowing and spending.

Stocks shot up on the news. But the decision will undoubtedly spark controversy, and this afternoon Twitter lit up over the move.

Read this story from PBS Newshour.


The question then is; why do we still believe that the Fed is in control?  There are many reasons for this, but mainly because we are instinctively optimists and have hope in the Fed.  If we lose this, the market will fall apart.  We also have more faith in the Fed than we do in politicians solving the core problems ailing the economy.  This is why we are now addicted to Fed stimulus and this is also why the Fed cannot stop QE. 


Since the launch of QE1, QE2 and QE3, two key things have happened.  First, the market is now disconnected from fundamentals, if good economic numbers come in, the stock market falls, if bad numbers come in the market rises.  Bad economic numbers mean QE continues and good numbers mean QE might come to an end. The market now prefers QE over economic improvement.


Second, hope and faith will not last forever.  Each new shot of QE is showing to be less effective than the previous one, while overall debt continues to rise with no end in sight.  There is no question that the Fed is losing control of the market, once a majority of us realize this, we will have a new and much bigger crisis on our hands.


Here’s what economist Lacy Hunt had to say recently about the Fed’s policies:


Four considerations suggest the Fed will continue to be unsuccessful in engineering increasing growth and higher inflation with their continuation of the current program of Large Scale Asset Purchases (LSAP):

  • First, the Fed’s forecasts have consistently been too optimistic, which indicates that their knowledge of how LSAP operates is flawed. LSAP obviously is not working in the way they had hoped, and they are unable to make needed course corrections.
  • Second, debt levels in the U.S. are so excessive that monetary policy’s traditional transmission mechanism is broken.
  • Third, recent scholarly studies, all employing different rigorous analytical methods, indicate LSAP is ineffective.
  • Fourth, the velocity of money has slumped, and that trend will continue—which deprives the Fed of the ability to have a measurable influence on aggregate economic activity and is an alternative way of confirming the validity of the aforementioned academic studies.

  Read the full article posted on Casey Research.