Many investors hold the belief that Federal Reserve Bank asset repurchases implemented by the Federal Open Market Committee (FOMC) are intended to directly elevate asset prices via open market operations. These open market operations purchase financial securities such as 10 year Treasury Bonds and other financial instruments in large scale. Indeed, there is evidence to support rising asset values, the price of gold has risen tremendously, commodities such as oil have risen and so have stocks. That is, at least in the short run these assets have experienced a tremendous rally despite relatively low volume in the stock market, and what seems to be a declining relative strength index and rate of change.
Several news media publications have reported on a statement made by Federal Reserve Chairman Benjamin Bernanke, in a Washington Post publication on November 4, 2010. This statement asserted the Federal Reserve Bank’s intention to increase asset prices and money supply. However, semantically, the word ‘should’ in the statement ‘help us fulfill that obligation’ is not supportive nor synonymous with the economic reality, and doesn’t seem to be a vote of confidence. Finances, market performance and monetary policy are much more than just semantics however, and the facts don’t lie, just the interpretation and presentation of those facts.
So what exactly are the facts? And where does the FOMC cash fund trail lead? It all depends on what one is trying to find out. If one is seeking to discover an objective outcome then as many facts should be looked at to create what would be a viable economic snapshot. In terms of market performance, FOMC lowers treasury yields via a higher demand stimulating a possible aversion to bonds for investment elsewhere. On November 4, 2010, 10 year bond yields dropped 5.15 percent according to MarketWatch. So when the $600 billion FOMC financing kicks in, which in market psychology it already has, which markets show clear trends that are supported by predictable causal events and how strong are those correlations in terms of relevance and influence?
There has clearly been a bullish trend in equity markets, largely attributed to the liquidity made possible by the Federal Reserve Bank and this trend is expected to continue by many including the Highview Financial Group in a fall 2010 report. The argument is when money flows into banks, it necessarily follows banks will want to do something with that money. That is a fair assumption, but what investment banks do with their newly acquired bond sale revenue is up to them and not necessarily the Federal Reserve.
With official unemployment near 10 percent, banking confidence in consumers may not yield a low risk, high return scenario so that leaves emerging markets, commercial lending, inter-bank swaps and a range of transactions that seem intended to benefit Wall Street more than Main Street. The hope is all the benefits will spread around, stimulate investment and trickle down for increased consumer spending so the economy at large will benefit as well. Seems more twice removed than primary purpose. However, with computerized research and trading, extra cash does lead to the logical hypothesis that some of that money will be invested in businesses that are doing well thereby raising equity prices and the potential for economic growth. After that becomes price in to the market risk naturally rises. The wealth affect in theory then transfers to businesses, and the question becomes, what do they really do with it?
Sources:
1. http://wapo.st/cnFIGO (Washington Post)
2. http://bit.ly/9nnFIl (Highview Financial Group)
3. http://bit.ly/aDyokU (Federal Reserve Board)
4. http://bit.ly/9DrzS3 (Zero Hedge)
5. http://bit.ly/2hUXD3 (MarketWatch)