Federal Reserve’s Success Or Failure Should Not Be Measured By Whether It’s Propping Stock Prices Up!

Every time the Fed makes a bold move these days, and it’s made many, and the market “fails” to react, we see a headline like this:

Dow falters despite Federal Reserve action” (Washington Post)

But no! We mean, yes, stronger stocks would be a nice aftereffect of the Fed’s moves, but boosting stock prices is not Job #1 for the Fed, nor should it be. The stock market’s response to a massive trillion dollar plus bailout bill from Congress, which will eventually pass (still probably sooner than later), will be a much fairer test.

One might argue that the number of times the Fed has had to intervene, including the most recent announcement it will support the financial markets with in effect an unlimited amount of money: “the amounts needed” is how the Fed puts it, is proof that it isn’t really getting the job done. And that might come closer to a legit criticism. Or at least that what it just announced it’s doing is something it was already doing anyway. The fact that the Dow or the S&P isn’t back on the rise has very little to do with it.

At the same time, except for Treasury Bonds, the bond market right now has completely locked up, because as we’ve said many times, there’s no visibility of where the COVID-19 crisis is headed, or where the U.S. is in it, because there still hasn’t been enough testing, which is a function of not having access to tests. In order to turn the economy back on, at the very least, the U.S. will need that capability and it’ll need to be up and running and running smoothly, so if people try to go back to work as normal, they can be pretty sure they won’t be killing other people.

While we’ve made no secret of the fact that we have great fondness for Fed Chair Jerome Powell, still we are surprised to find ourselves today in the unlikely position of defending a massive central bank.

At least the Fed’s actually getting money out the door. A record amount. Some of our readers will even probably say an irresponsibly large amount that’ll come back to haunt the U.S. financial system later. And they could be right. Still, Congress and the White House except for an early relatively small support package haven’t gotten any financial support out. We don’t care why — just get it out. Then again, if Trump intends to “reopen the country” in as little as a week from now, as he’s vowed in Tweets of late and his daily Coronavirus news conference, shouldn’t Congress rethink doing what could be a near $2-trillion stimulus, because it might not be necessary in that case? (That’s not a real question.)

Yes, the 2008 housing collapse and subsequent financial crisis, which led to the Great Recession, might’ve been a more direct hit on the U.S. banking system than the Coronavirus. At least in part because banks themselves caused that crisis, unlike this one, so they weren’t in any condition or mindset to deal with it effectively. Doesn’t change the fact that right now might be the biggest, most unexpected, and most sudden disruption to the U.S. economy in history.

And yet at least in part because of what the Fed’s been up to:

  • No banks have collapsed. (Some did last financial crisis.)
  • There’s been no run on ATMs. Even though there has been on things like toilet paper and eggs.
  • No Money Market Funds have “Broken the Buck”.

Not yet at least.