My Mom has always been all about veggies. As a kid there was always a pile of veggies on my plate, some varieties more palatable than others.
I learned a trick to stuff all my veggies into my mouth right out of the gate, the logic being unpleasant warm veggies tasted better than unpleasant cold veggies. And once the veggie issue was out of the way, I could better enjoy the meal.
Last week we discussed investor obsession with the Fed’s bond-buying QE policy. This policy presents some inherent moral hazards, and as metrics on the economy have improved it was widely anticipated the program would have to be reduced or “tapered”.
No one really knew what to expect when this tapering process began, and there was a high level of anxiety among investors the current stock market rally would abruptly end without the Fed keeping this easy money policy on full throttle.
Like a kid staring at their vegetables until they have turned cold and mealy, the financial markets were dreading this announcement for the primary reason of simply hating the uncertainty.
On Wednesday afternoon the announcement came. The Fed will begin reducing its $85 billion a month bond buying by $10 billion in January. As opposed to the world ending, the Dow actually rallied 292 points on the news, and here’s a wrinkle in the logic: The Fed scaled back its bond buying by $10 billion a month and the stock market added $350 billion of market cap value in one day in reaction.
At least over the very short term, the QE obsession appears overblown. The Fed has three high profile tools in its toolbox to use in influencing our economy. Short-term interest rates, which impact savers and businesses through interest paid on deposits and the cost of borrowing. QE, which is designed to more efficiently target certain areas of the bond market. And what is called forward guidance, which attempts to provide the public with direction on how the other two tools will be used going forward.
While the QE announcement received all the attention, the forward guidance provided at the same time made it clear the Fed intends to continue suppressing short-term interest rates for what appears to be the foreseeable future, and it is committed to maintaining a protective policy posture if economic growth begins to slow.
As someone who believes in free markets, I can’t help feeling “parented” by the Fed. Wednesday we were forced to take our first bite of veggies, and they didn’t taste too bad. At the same time, however, Mom and Dad did what they said they were going to do, and made it clear they were standing behind us if things got rough.
These are good parenting techniques, and were apparently enough to encourage investors to take a few big baby steps on their own. Let’s hope we are running in no time. Happy Holidays.