Evolution of Fed's QE- Treasury/municipal bonds-> corporate bond ETF-> individual corporate bond-> Yield curve control (in potential development)-> Maybe... Individual stocks in the future...
As Fed adds more debts to its balance sheet, it hampers its ability to effectively intervene the market in the future. It will need progressively more and more stimulus packages to get us out of the subsequent financial crisis.
Forward guidance-
Odyssean forward guidance: Fed publicly commits the FOMC (Federal Open Market Committee) to a future action.
Try to imagine the following highly improbable scenario- If Fed announces tomorrow that it will raise interest rate to 10 percent and slashes all the govt bonds on its balance sheet, how will the market react? Even something much less extreme of an announcement will and can drive the public sentiment and change the public perception of the market instantly even before the action is actually carried out. Now, that is the power of forward guidance.
Yield curve control (YCC)-
Basically, Fed has strong control over the short-term interest rate, but much less so on the long-term interest rate. In order to influence the long-term yield, Fed would shift purchase toward longer maturities and target some longer-term rate and pledge to buy enough long-term bonds to keep the rate from rising above its target. Fed employs the strategy of selling short-term treasuries and uses the funds to buy longer-term bonds in order to stimulate and spur borrowing, investment and economy if brings short-term rates to zero isn't enough.
Next, we will look at how effective these tools really are by examining few of Fed's past market interventions.
First the CPI does not react right away. You have to look into the velocity of money... how often or quickly new or existing money moves between hands. All this money printing is just getting jammed into stock and under mattresses. No one is out going on vacation or blowing it on toys... they are concerned about their future and paying bills. Once those people get comfortable, all that money will come crashing into the market (Velocity of money will speed up) and the price of everything will skyrocket.
Second, the CPI is a cooked up metric the fed uses as an excuse to print more. Use the CPI formula from the 80's and 90's and see how terrible it looks. Bunch of thieves.
Libratus
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@mailbrent, I will talk about M2V in another post. I will look up how CPI is a crooked metric haha
StoneLuv
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@mailbrent, how is it that a gallon of bleach costs $10 at the dollar?
Libratus
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@mailbrent,
UnknownUnicorn5511258
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Nice post.
Would recommend taking a look at shadowstats.com for actual CPI numbers. The data disclosed is often subject to certain "substitution" and/or "hedonic bias."
For example, if beef has been used to calculate CPI for the past 20 periods but has been unusually inflationary over the most recent period, it can be substituted for something categorically similar like chicken, if chicken's relative price increase is less accentuated/more favorable for whatever picture the FED wants to paint.
While some may dismiss this as conspiratorial ( I did until I started really digging), would really suggest checking out the site mentioned above.
The actual data (CPI, Unemployment, GDP, M3, etc.) are significantly different than what is reported. It might just surprise you.
Libratus
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@Perma_Pig, Nice info. Time to do some digging around.
otisfx
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I don't think they will ever raise them again at least not this decade.
Libratus
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@otisranson, We will see... Last time we had an inflation higher than 4% was in 2007.
PolarHusk
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You're doing great
ProSignalsFx
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Interesting point, but your overview forgets to answer the question as to why the feds intervention did not create infaltion.
Check out my article on that subject
Second, the CPI is a cooked up metric the fed uses as an excuse to print more. Use the CPI formula from the 80's and 90's and see how terrible it looks. Bunch of thieves.