What about today? The
Fed Funds rate has been at 0% since December 2008 yielding the rate meaningless
in understanding just how Fed policy is influencing the financial markets, much
less the economy as a whole. I separate
the stock market from the economy because increasingly, and particularly since
the new Fed policy of using excessive amounts of QE as a tool in its policy,
the two have diverged in correlation. In
fact, from a pure numbers standpoint, it can be argued that over the last 6
years, Fed policy has been an outstanding success in pumping up the stock
market. Stocks have risen from the
depths of 666 on the S&P500 to over 2000.
Economic growth, however, has struggled to exceed 2% in real terms, and
3%-4% nominally.
The Fed has announced that it will now end for the
foreseeable future, its bond buying program known as QE3 in the market (the
program followed QE1 in early 2009 and QE2 in early 2011). Stocks went progressively higher with QE as a
backstop. With the QE program ending for
the time being, will the stock market suffer from the change? Logically given the correlation one might
suspect trouble; but what indicators should an investor monitor?
The answer to these questions is completely up to what
happens to the bubble the Fed has created on its balance sheet, and
correspondingly the high level of excess liquidity that it has created within
the U.S. banking system. One such
indicator that is likely to become useful in the post QE3 distorted financial
market is the level of excess reserves in the U.S. banking system. (Excess Reserves of Depository Institutions)
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