Why our market and Wall St loved the Fed

THE key to understanding the Fed’s impact on markets right around the world and the counter impact of the markets – and one overwhelmingly in particular, Wall St – on the Fed, is the difference between what the Fed says it might do and what it actually

does.

Thursday morning downunder time, the Fed did

what I foreshadowed – nothing. It left its official interest rate at zero; it said it would keep buying the $US120bn of bonds a month that it’s been doing since last year. I’m not claiming any great prescience – that’s what any awake, as opposed to woke, economist on the planet would have “predicted”.

Why, it’s like “predicting” Chairman Dan will terminologically inexactly bloviate at his next press conference; that Premier Gladys will likewise prattle away at hers.

That $US120bn figure translates to around $165bn in downunder dollars. That’s buying around $40bn a week or 10 times the $4bn a week that our Reserve Bank is now buying in its similar program. It means the RBA program is slightly more liquidity-generous in comparative terms. Now, in contrast to what it actually “did”, the Fed said it might

start “trimming” – or, the hip word, “taper” - those purchases in November. Also that it might start to raise the rate next year.

Actually, “the Fed” said no such things.

The official statement – signed by the 11 voting members of the FOMC (the actual rate-deciding group) – made no reference at all to a possible 2022 rate rise.

It said only that the rate would stay at zero “until labor (sic) market conditions have reached levels consistent with the committee’s assessments of maximum employment and inflation has risen to 2 per cent and is on track to moderately exceed 2 per cent for some time”.

And the only thing the official statement said about the bond buying was that a moderation might – that word again – “soon be warranted”.

It was only in his press conference that Fed chairman Jerome Powell said the first rate rise “could” – a slightly less committing word than “might” – be in 2022; and that “soon” for the taper, again, “could” be after the next meeting in November. Now, you can generally “take to the bank” what the Fed chairman says, just as you do when RBA governor Philip Lowe speaks.

There is one small uncertainty with Powell: he mightn’t be there when that “soon” arrives or we get deep into 2022. His term expires in February and President Biden has yet to say he will be reappointed. Powell’s predecessor, Janet Yellen, though, is Biden’s Treasury Secretary and she’s backed his reappointment; and Biden will do what he’s told, unless of course he forgets.

Now, all of this – the formal statement and Powell’s comments -were projected on the back of an assumed booming economy and a promise that the Fed would lag the boom in any tightening action.

Wall St said thank you; we knew you’d keep filling up the punchbowl and the Dow recovered over 300 points of its early-week loss.

The “did” – keeping rates at zero and the $US120bn a month money-printing – far outweighed the vague “coulds” about tightening.

Especially when they came with the guarantee that tightening would require the sort of booming economy that boosts corporate profits and share prices, thereby likely offsetting the impact of higher rates and slightly less liquidity on share valuations.

That’s the Fed’s impact on Wall St. The reverse is Wall St’s ability to “throw a tantrum” – to cause the Fed to back off any “tapering” and postpone any even future possible rate rises into the never-never, by dropping, say, 2000 points. The next stop in this dance between Fed and Street is the early November meeting around (our) Cup time – with all the US data that surfaces writing the music.