This Fed Driven Stock Market Boom Cannot Be A Good Thing – It Is Not Sustainable And It Will Not Last

By Paolo von Schirach

June 1, 2013

WASHINGTON – The stock and bond markets jitters that we have experienced in the last few days are the direct result of  distortions caused by heavy and protracted Fed manipulation. Any perception, right or wrong, that the Fed may end (gently or abruptly) its easy money policy, therefore creating new competition for stocks as the only viable investment causes abnormal movements. Bonds go down. Then they go up. Stocks gain and then they lose. I am not even going to try and predict what may come next.

Fed manipulation not a good thing

But I have a strong feeling that it is not the Fed’s job to try and influence investment decisions by endlessly manipulating interest rates. One thing is for the Fed to intervene in emergency situations, provided that the intervention is focused and with a limited time horizon. What we have here is instead a monetary authority that, lacking credible Washington policy changes, has become (by default) the only economic policy maker. Of course, the Fed’s can state that it is only doing its job. Its mandate includes trying to achieve or maintain high levels of employment. By encouraging investors to put money in stocks, since all the other instruments yield nothing, the Fed can argue that it is stimulating the capitalization of publicly traded companies, this way encouraging growth and hopefully jobs creation.

The American economy now looks better than it actually is 

Laudable goals. But I do not believe that this is a good idea. Now we have a Fed-driven stock market boom in what is a lackluster economy limping along with a semi-decent but hardly impressive 2.4%  growth rate. Is this yet another asset bubble? Who knows. But it is clear that in this at best so-so economy stocks would look far less attractive if bonds, or even old fashioned savings accounts, would provide a real alternative for investors.

Economist debate whether this Fed orchestrated quantitative easing is working or not in terms of additional jobs creation. I am not sure. But I am sure that America now is like a weak patient whose conditions look a lot better than they actually are simply because doctors are administering steroids and other feel good drugs.

Undoubtedly the patient feels better. But his health has not improved that much.

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