The Fed's Dilemma

QE Cut By Another $10B: 

On Wednesday 4/30, the Fed ended its two-day meeting and tapered QE by another $10B. The vote was reduce QE from $55bn to $45bn per month. The Fed said the economy slowed in Q1 because of the weather. The focus remains firmly on the outlook for labor and inflation, both of which remain below par as the Fed continues to withdraw its level of stimulus.

Fed’s Mandate:

According the Fed’s website their mandate is:
The Congress established the statutory objectives for monetary policy–maximum employment, stable prices, and moderate long-term interest rates–in the Federal Reserve Act.
What does this mean in English?
The Fed’s job is to keep both Main Street and Wall Street on the right track.

The Fed’s Dilemma: Short Term Effects

Since the 2008 financial crisis, the Fed has printed unprecedented amounts of money (QE) to help fulfill its mandate. In an ideal world, QE is intended to be temporary in nature while the effects of QE are intended to be long-term. The problem the Fed faces is that the effects are also temporary in nature. The Fed’s real dilemma is what will happen to both Main St & Wall Street when they stop printing?

Let’s Analyze The Facts:  

The facts clearly show that things are good when the Fed is printing and “not-so-good” when the Fed stops printing. Every time QE ends, stocks tank (chart attached), and even with QE, the economy is barely growing (“new normal” of very low single digit economic growth). When QE1 and QE2 ended, the benchmark SP 500 fell -17% and -21%, respectively. Main St is barely growing and even now with QE 3 slowing down, Q1 2014 GDP was barely in the black. The facts also show that QE is working because both Main St (US economy) and Wall St (the S&P 500) are at record highs. One could easily argue that without QE (or some other massive stimulus from global central banks), we would not be in this position only a few short years after the Great Recession.

Time Heals All Wounds:

I’m VERY bullish on our future and know that time heals all wounds. We are trending in the right direction, maybe not as fast as people like, but we are still moving in the “right” direction and that is what’s important from an investing/trading standpoint.

S&P 500 & QE

SPX - QE Review