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Federal Reserve, stock and market implications

November 04, 2021

The recent comments from Federal Reserve chief Jerome Powell indicated just how dovish the Federal Reserve is right now. Although they did announce a tapering of bond purchases. They pushed out any thought of raising interest rates. I took his comments as being very dovish and market friendly. 

At the height of the pandemic, the Federal Reserve stepped in and announced a wide sweeping bond purchasing program to add liquidity to the marketplace and to shore up the possibility of bond delinquencies. This helped boost the stock and bond market which was having a very difficult time. 

There’s an old saying on Wall Street “bull markets don’t die of old age, they are killed by the Federal Reserve.” This was true as we entered the great recession. The Federal Reserve had been raising rates dramatically just prior to the recession. They were trying to stem the rate of inflation at the time. However, they overdid the raising of interest rates and killed both the market and the economy. 

This Federal Reserve seems content with waiting to see if the inflation we are currently having sticks with us. They believe inflation will subside as we get into the spring of 2022. I’m certain some of the inflation has to do with supply chain issues, however some of this inflation seems to want to stick around. There has been a push by the federal government to slow oil and natural gas expiration, production and transportation in the United States. This is adding to the inflation picture. 

The Federal Reserve has a dual mandate, stable prices and full employment, they will continue to push the boundaries of these mandates. They will allow prices to inflate further in the goal of making sure we have full employment. 

The Federal Reserve has two main tools to reach their objective. The first tool they often use is to raise and lower the federal funds rate. The federal funds rate is the rate at which the Federal Reserve targets for lending between commercial banks overnight. One bank might lend to another there excess reserves, so the banks can maintain liquidity. This rate is now currently 0%. 

The other Federal Reserve tool that’s in more focus right now is there bond purchasing program. The Federal Reserve has been purchasing bonds monthly. This adds liquidity to the market and lowers interest rates. The Federal Reserve becomes a competitor to other bond purchasers. This drives down interest rates and lowers borrowing costs for individuals and companies. They are slowly tapering this bond purchasing back. The bond purchasing should end by mid 2022. 

By tapering their bond purchasing program interest rates should slowly start to rise. If they don’t, it will be a sign of a slowing economy. However, they are slowing their purchasing gently. And, I don’t believe that this will be an impediment to the stock market. 

I listen to the questioning carefully on when Chairman Powell thought that they might start raising the federal funds rate. His comments were very benign and discounted the possibility of starting to raise interest rates anytime soon. I also found those comments to be bullish for the market. 

We are in a long-term secular bull market for stocks. You can have corrections and cyclical bear markets at any time during these long bull market trends. I found nothing in the Federal Reserve comments to make me feel as though stocks should start to sell off soon. We are heading into the best time of the year for the market and I am still bullish.

The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.