CNBC: The Fed's Monetary Juice Has Tied Directly to the Rise in Stocks: 'Here We Go Again'

November 07, 2019

Article by Jeff Cox in CNBC financial

Financial markets have seen this story before: The Federal Reserve rides in with piles of freshly minted digitized money that helps send the prices of stocks and other assets lurching forward.

But this isn’t 2009.

Instead, it’s 2019, and once again the central bank, whether by intention or coincidence, has seen its efforts to keep the financial system running smoothly end up as a bonanza for Wall Street, where the decade-long bull market has taken another leg higher in step with a Fed liquidity effort.

Since a mid-September flare-up in the repo market, where banks go for overnight financing, the Fed has been injecting billions into the markets, buying up mostly short-term Treasury bills in an effort, ostensibly, to keep its benchmark funds interest rate within its targeted range, currently at 1.5% to 1.75%.

The results:a $175 billion expansion of the Fed’s balance sheet to $4.07 trillion,representing growth of 4.5% since the operations began. During that time, the S&P 500 has risen just shy of 4%.

Financial imbalances

QE and the latest round of stimulus are “absolutely” similar, said Lisa Shalett, chief investment officer at Morgan Stanley Asset Management. “Financial conditions are extraordinarily loose and accommodative. One of the things that the Fed balance sheet liquidity has done has also been to allow the U.S. dollar to weaken for really the first time in about two years. These are things that are definitely contributing to this move in the market.”

Shalett said the Fed’s moves have also caused financial imbalances elsewhere, a key concern for central bank officials who have pushed back against the recent interest rate cuts and looser policy. She cited the since-abandoned WeWorks initial public offering as one example of money looking for financial assets rather than being put back into the real economy.

“This really speaks to the idea that once again we’re on the brink of potentially being in this bubble, where valuations are about the story and the narrative and not about the cash flow and profits,” she said. “You would think we would have learned this lesson before. But here we go again.”

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