We have discussed in prior articles the power of the Federal Reserve, but I don't think we truly comprehend their influence on markets and society as a whole, states Bob Lang of Explosive Options.
No doubt sweeping Fed policy has triggered more bullishness in markets than ever before. The committee fears a stifling of economic activity from a pandemic that really had no timeline. With a US population of more than 330 million people the effects of a second Great Depression would have devastating consequences. In most circles, the Fed made all the right moves.
We are not here to judge current or past Fed policy. As academicians, the committee members can rely on their knowledge, models, and short-term experience from the Great Financial Crisis (similar fear presented, several on the committee and Treasury Secretary Yellen were deeply engaged in the recovery).
The influence of the Fed runs deep and wide. For instance, stated policy is often replicated by other central bankers, following the lead of the world's most powerful bankers. While the FOMC is charged with two goals—achieving price stability and maximum employment, Fed policy is certainly the standard by which other governments will replicate.
It's been said recently the stock market has been a huge beneficiary of easy money policy over the past year. This in turn has created an enormous money supply and with constant bond purchases we have a massive Fed balance sheet. With a stroke, the Fed has simply blotted out any fear of taking risk.
But all the above is well known and is constantly debated. So, where is some “hidden” Fed power? We turn to the calendar—which has no markings on when this will end. The Fed simply can extend itself for as long as it takes, their hope is the economy turns up and jobs come back sooner rather than later.
It has been a risky move but might eventually pay off. To be certain, the inflation genie might be starting to squirt out of the bottle for a visit after 42 years of being stuffed. We'll see how this unfolds, but for now—Don't Fight the Fed!
Learn more about Bob Lang at ExplosiveOptions.net.
