For most of the five-year bull market, the Federal Reserve has been the life of the party. Now, it’s sitting on the sidelines.
Stocks have tanked in recent weeks as investors fret about slowing global growth, geopolitics, and Ebola. The Fed’s strategy during previous bouts of fear was simple: flood the market with stimulus and vow to hold down interest rates seemingly until the end of time.
Unfortunately, those strategies are no longer viable. Most investors expect the cheap money to end next month and for interest rates to rise by next summer.
“Policymakers are running out of ammo,” said a morning note from Ed Yardeni at Yardeni Research. “There’s not much that the Fed can do to boost global economic growth other than delay raising interest rates next year, which I’ve characterized as the ‘none and done’ option.”
Technically the Fed, lead by Chairwoman Janet Yellen, could reverse course and ramp up its bond buying program. San Francisco Fed President John Williams, a prominent member of the Fed’s operating committee, raised that prospect this week in an interview with Reuters.
But the Fed has been working diligently to unwind that program since the beginning of the year, and an about face on that policy could make investors even more nervous by giving off the impression that the Fed doesn’t know what its doing, claimed Allen Sinai, Chief Economist for Decisions Economics.
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