My Favorite chart for the month of October comes courtesy of Zerohedge. Zerohedge points out the schizophrenic policy views of St. Louis Fed President James Bullard. Bullard is sometimes a policy hawk and other times a dove, but mostly he is just consistently inconsistent. Just days before the market corrected, Bullard was out boasting about a strengthening economy and the need to remove monetary accommodation (read end QE and hike rates). Days later he had a change of heart.
His change of heart didn’t come from the economic data that the Fed regularly assures us its policy is dependent upon. It was instead the horror of a whopping 7% stock market correction. And it wasn’t a small change. Bullard did an about face. He single handedly tried to set a floor under the stock market.
What’s the best way to set a floor under the stock market? Quantitative easing of course. Bullard threw some red meat to traders and speculators by announcing that the “the logical policy response at this juncture is to delay the end of QE.” As the chart below shows, his tactics worked. A powerful stock market rally that has erased all of the losses in October over the course of a few days began the minute Bullard’s announcement hit the news wires. It could be a coincidence, but I doubt it.
I don’t mean to pick on Bullard. I present this example only to highlight how unhinged monetary policy has become. Fed policymakers are flying by the seat of their pants. One day conditions are ripe to tighten policy, the next day after a mini correction in the stock market, the Fed tells us more money printing is needed. One month we are told QE will end when the unemployment rate hits 6.5%. When that target is reached we are told to instead look to some fuzzy notion of labor market slack to gauge when policy will be tightened. The goal posts have been moved and changed repeatedly by the Fed.
It is a frustrating time to be an investor as opposed to a speculator or trader. Fed liquidity as opposed to fundamentals are the primary driver of asset prices today.
We should find out more on the Fed’s latest policy focus when a two-day meeting ends this afternoon. Was Bullard the lone shooter in mid-October or was Yellen a co-conspirator? I suspect, other members on the Fed recognize how ridiculous they would look and how much credibility the Fed would lose if they continued quantitative easing in response to a mini stock market correction, but don’t be surprised if there is a more dovish tone to the Fed’s policy statement.
Jeremy Jones, CFA
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