The Federal Reserve has opened more than $6.6 trillion in short-term loans to the repo market since September 2019 to keep interest rates low and the markets open.
And although they refuse to call a spade a spade, the Fed also has been buying short-term Treasury bonds at a rate of $60 billion a month, but they refuse to call it what it is: Quantitative Easing.
They had announced plans to take the crutch away first by February and then by mid-February. However, the Fed also said it was ready to continue feeding the markets cheap money well into this year.
Still, the markets were uneasy when Fed chair Jerome Powell said in a press conference last week that the central bank was ready to close its wallet when there was “ample” cash in the markets.
Powell said, “As our Treasury bill purchases bring the underlying level of reserves up to an ample level on a sustained basis, the necessary quantity of overnight and term repo [aid] will gradually decline.” He did not define “ample” or “gradual.”
Some investors worry that the Fed’s withdrawal could provoke a broad market sell-off among those who think that the markets are relying on the Fed’s cheap money to keep stock prices up.
During the 32 minutes that Powell spoke, the Dow Jones average dropped 121 points.
“My biggest fear is that [Fed managers] stop in the middle of the year [and investors] see this as quantitative easing ending,” said Seema Shah, chief strategist at Principal Global Investors. “You could see a tightening of financial conditions.”
She praised the Fed for flagging its intentions weeks or months in advance so investors can prepare strategies ahead of time.
TREND FORECAST: What a difference a week makes. The Dow and equity markets – no longer fearing the coronavirus and now agreeing with our forecast for lower interest rates – are again spiking higher. Yesterday, the Dow surged over 480 points.
It should also be noted that despite rising markets and a stronger dollar, gold prices, while falling sharply this week, are still above the $1,550 per ounce range, which we forecast will prove bullish for prices to continue to move higher.
Should gold break below that mark and languish lower, we forecast gold’s bottom at $1,390 per ounce.
