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On which stocks are most affected by the fed, see my reply to the other reply (which makes roughly the same point) here https://news.ycombinator.com/item?id=662

On which stocks are most affected by the fed, see my reply to the other reply (which makes roughly the same point) here https://news.ycombinator.com/item?id=6623769 https://news.ycombinator.com/item?id=6623769 On the evidence you are presenting: This doesn't prove that the Fed is causing a stock bubble. The stock market, if anything, is forward looking. Even if the fed was causing a bubble, the kind of patterns you are showing wouldn't be expected. Take the second link, for example. The article clearly states that the stock price gains are made before the FOMC announcements. So somehow the act of making any announcement is causing the market to react in anticipation. I don't know how to explain these patterns, but they are certainly not good evidence for the Fed causing a bubble. Monetary policy is very simple and in accordance with the best macro theory we have. The Fed lowers interest rates in recessions, in the hope that it will cause people to consume/invest more and "save" less where saving might include holding hard currency, or safe physical investments. Put in more conventional language, the Fed lowers interest rates to stimulate economic activity. But this should not be interpreted as trying to cause a bubble. The aim of the Fed is to stimulate economic activity so that both the current efficiency of the economy improves, and beliefs about the future efficiency of the economy are more optimistic. In doing so, it hopes to cause the economy to move from the "unnatural" state in which people are fearful about the future, expect high interest rates, and are unwilling to invest or consume, to the "natural" state in which people are optimistic about the future and expect low (short and medium term) interest rates.

adventured 13y ago
The Fed lowers interest rates for extended periods of time, and we see three stock market bubbles directly following. This happens three times, in dramatic fashion, in just the span of about 17 years. Personally, I don't need more empirical evidence than that. Fortunately we have a mountain of direct evidence to support my position. Monetary policy being simple has nothing to do with its results. Cheap money doesn't stay put, it chases returns. Our supposed best macro policy is a disaster. It has neither contained price inflation, nor produced jobs. Quite the opposite in fact over the last two decades of high level Fed tampering with the economy. Said macro policy is not the best at all, it's standard issue failed Keynesian policy (Japan has been enjoying a similar program for decades as their economy has rotted and accumulated hyper debt). Not only has the Fed admitted it can create asset bubbles with low rate policies (both Greenspan and Bernanke have acknowledged such); not only has the Fed said that they want to spur asset inflation, to generate a wealth effect (they directly said their goal was to re-inflate housing for example); but the US Treasury and the Fed's own governance board has also stepped forward to say that the Fed's policies directly drive asset bubbles, including in the stock market. The Fed's governance board recently warned that the Fed's policies were creating potentially dangerous imbalances in asset prices; that was a year ago. Then all the direct correlation data: "between January 2009 and April 2013, on days in which the Fed POMO was more than $5 billion, the stock market rose a total of 570 points, on days in which the POMO was less than $5 billion, the cumulative stock market gain was "only" 141 points, and when there was no POMO, the S&P gained... -51 points." OR: "We show that since 1994, more than 80 percent of the equity premium on U.S. stocks has been earned over the twenty-four hours preceding scheduled Federal Open Market Committee (FOMC) announcements (which occur only eight times a year)—a phenomenon we call the pre-FOMC announcement 'drift.'" The data points are extraordinarily overwhelming in supporting the fact that the Fed's policies directly drive the stock market. We have the logical (get rid of yield on cash, money has to chase risk), the empirical (the charts and data), and all of the players admitting it. We also have the perverse: watch CNBC on Fed announcement days. If that doesn't convince you, there's nothing that can.
- yetanotherphd 13y ago
  I already addressed both the things you mentioned after "then all the direct correlation data:". If you're going to completely ignore what I write, there isn't much point having a discussion. (What I said was, "On the evidence you are presenting: This doesn't prove that the Fed is causing a stock bubble. The stock market, if anything, is forward looking. Even if the fed was causing a bubble, the kind of patterns you are showing wouldn't be expected. Take the second link, for example. The article clearly states that the stock price gains are made before the FOMC announcements. So somehow the act of making any announcement is causing the market to react in anticipation. I don't know how to explain these patterns, but they are certainly not good evidence for the Fed causing a bubble.")

adventured 13y ago

The Fed lowers interest rates for extended periods of time, and we see three stock market bubbles directly following. This happens three times, in dramatic fashion, in just the span of about 17 years. Personally, I don't need more empirical evidence than that. Fortunately we have a mountain of direct evidence to support my position. Monetary policy being simple has nothing to do with its results. Cheap money doesn't stay put, it chases returns. Our supposed best macro policy is a disaster. It has neither contained price inflation, nor produced jobs. Quite the opposite in fact over the last two decades of high level Fed tampering with the economy. Said macro policy is not the best at all, it's standard issue failed Keynesian policy (Japan has been enjoying a similar program for decades as their economy has rotted and accumulated hyper debt). Not only has the Fed admitted it can create asset bubbles with low rate policies (both Greenspan and Bernanke have acknowledged such); not only has the Fed said that they want to spur asset inflation, to generate a wealth effect (they directly said their goal was to re-inflate housing for example); but the US Treasury and the Fed's own governance board has also stepped forward to say that the Fed's policies directly drive asset bubbles, including in the stock market. The Fed's governance board recently warned that the Fed's policies were creating potentially dangerous imbalances in asset prices; that was a year ago. Then all the direct correlation data: "between January 2009 and April 2013, on days in which the Fed POMO was more than $5 billion, the stock market rose a total of 570 points, on days in which the POMO was less than $5 billion, the cumulative stock market gain was "only" 141 points, and when there was no POMO, the S&P gained... -51 points." OR: "We show that since 1994, more than 80 percent of the equity premium on U.S. stocks has been earned over the twenty-four hours preceding scheduled Federal Open Market Committee (FOMC) announcements (which occur only eight times a year)—a phenomenon we call the pre-FOMC announcement 'drift.'" The data points are extraordinarily overwhelming in supporting the fact that the Fed's policies directly drive the stock market. We have the logical (get rid of yield on cash, money has to chase risk), the empirical (the charts and data), and all of the players admitting it. We also have the perverse: watch CNBC on Fed announcement days. If that doesn't convince you, there's nothing that can.

yetanotherphd 13y ago
I already addressed both the things you mentioned after "then all the direct correlation data:". If you're going to completely ignore what I write, there isn't much point having a discussion. (What I said was, "On the evidence you are presenting: This doesn't prove that the Fed is causing a stock bubble. The stock market, if anything, is forward looking. Even if the fed was causing a bubble, the kind of patterns you are showing wouldn't be expected. Take the second link, for example. The article clearly states that the stock price gains are made before the FOMC announcements. So somehow the act of making any announcement is causing the market to react in anticipation. I don't know how to explain these patterns, but they are certainly not good evidence for the Fed causing a bubble.")