The Fed just approved an open-ended balance sheet expansion.
In its announcement on Thursday, the Federal Reserve set the scene for continued monetary accommodation. They publicized their intention to purchase $40 billion of Mortgage Backed Securities per month. That’s on top of $30 billion they’re already buying, which now should absorb 75-80% of new mortgage production. And they didn’t set an end date. Until unemployment falls, this new policy could be in place for a long, long time.
Naturally, with the Fed supporting the market, stocks are rallying. “Don’t fight the Fed,” goes the saying. As long as the central bank keeps the tap open and dough keeps flowing, the market will remain well-bid.
The same thing is happening in Europe. Mario Draghi announced that the ECB will buy an unlimited amount of government bonds of up to 3 years’ maturity. Also, the Euro Stability Mechanism (ESM) can directly fund member governments—something the German Constitutional Court affirmed on Tuesday. The Fed and the ECB have committed themselves to using the heavy artillery of monetary policy—and now they have an unlimited supply of ammunition!
Global Central Banks have given notice: “We have a bazooka and we know how to use it!.” Don’t fight the Fed, but look out for the law of unintended consequences!
Douglas R. Tengdin, CFA
Chief Investment Officer
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