click for larger graphic


Terrific chart from Doug Short looks at the impact of the Fed on markets:

We’re well into our sixth month since the latest Federal Reserve intervention, Operation Twist, was officially announced on September 21. We’ve now seen several bouts of aggressive Fed attempts to manage the economy following the collapse of the two Bear Stearns hedge funds in mid-2007 about three month before the all-time high in the S&P 500 . . .

If a picture is worth a thousand words, this chart needs little additional explanation — except perhaps for those who are puzzled by the Jackson Hole callout. The reference is to Chairman Bernanke’s speech at the Fed’s 2010 annual symposium in Jackson Hole, Wyoming. Bernanke strongly hinted about the forthcoming Federal Reserve intervention that was subsequently initi

Good stuff. The two-fold question is: 1) When do the fundamentals trump Fed liquidity? 2) What will the Fed do in response to a falling market?


Fed Intervention and the Market: New Update
Doug Short
DShort, April 10, 2012

Category: Federal Reserve, Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

23 Responses to “How Has Fed Intervention Impacted Markets?”

  1. GB says:

    I would like to see a text bubble around the 2009 bottom that says reinstatement of mark to market.

  2. ex1 says:

    correlation vs. causation…

  3. Moss says:

    A few other choice metrics would be volume and net retail flows.

    This ‘market’ is totally rigged by the professional players, Banksters, and Central Banks.
    The Wealth effect, currency devaluation (i.e inflation), and CB balance sheet expansion is the prescription.

  4. dkelland says:

    This is a perfect example of a confounding variable. What if fear about developments in the global economy drive both risky asset prices and Fed policy? A century of market data suggests that markets make lows when fear reaches high levels and that the Fed tends to intervene when economic conditions deteriorate. It is also worth noting that one would have taken quite a draw-down buying on the Fed intervention in the Fall of 2008.

  5. obsvr-1 says:

    @GB Says:
    April 11th, 2012 at 11:15 am
    I would like to see a text bubble around the 2009 bottom that says reinstatement of mark to market.

    **** reply


    in other words, the FASB arm twisting to remove Mark to Market in favor of Mark to Model (Myth).

  6. obsvr-1 says:

    wrt the questions

    1) Long term, fundamentals will prevail — but NOT until the FED stops intervening; while the FED intervenes fundaments are driven by the FED pump

    2) More QE, just with new terminology to obfuscate the reality (MBS Toxic asset purchase: QE1, Bond buying: QE2, Bond swapping: Op Twist (QE3) … QE4 continue to enable fiscal spend by buying Bonds, add muni-s to save the State/Local butts, and do back door EU pumping … who knows, but until FED/Gov’t Stimulus ends the answer to #1 above remains — Not until FED stops intervening.

  7. xon says:

    Not a finance pro at all, but I noticed that before each of the last 3 interventions, volatility (I think) was very minimal. (I wonder if by the time Twist happened someone had some forecasting software that predicted a decline in volatility?) After the interventions some wild, multi-day or -week swings kicked in.

    Again, no actual knowledge, but wouldn’t the reduced variations in the market favor trading firms (profits on the way up, and fees on the way down)? So, the Fed actions would have the effect of a ‘bailout’ for Wall Street, while, apparently, not really moving the market as a whole?

  8. Bill Wilson says:

    I don’t think the FED’s impact on the economy should be understated. I’ll admit that correlation does not equal causation, but it shouldn’t be ignored either.

    We’ve had two years in a row of the FED starting stimulus in August, and strong job growth over the winter. I don’t see why they won’t try it a third time.

    I’m not a believer in the FED’s dual mandate. I think the growth that the FED provides by increasing the supply of money comes with consequences, but I’ll admit that the FED can affect the economy.

  9. Sechel says:

    Would be intersting to see the same with Commodities(in other words how did other risk assets react?)

  10. scecman says:

    On the timeframe for Operation Twist, it shows running until June/July 2012. Is this the “announced” end of the program or the authors guess?

  11. ironman says:

    That chart looks a bit familiar!…

    But we do appreciate that Doug has updated it to include Operation Twist. One thing we do note however is that Operation Twist does not have anywhere near the same effect upon stock prices as did QE 1.0 and QE 2.0 – if anything, the stock market is performing largely as if it is mainly being driven by normal investor expectations.

  12. bear_in_mind says:

    Great chart! However, at some juncture I would question its future validity. One day, The Great Wizard of Oz (i.e. The Bernank) is going to pull his magic lever and very little will happen. You can already see diminishing returns borne out in the charts with each successive yank on the lever.

    Now, that’s not to suggest you shouldn’t TRADE on Fed intervention – the data is abundantly clear that Fed intervention is a trader’s best friend. But when Ben’s magic lever runs out of magic, especially seeing how easily low-volume is pushing around the market, it’s not going to be pretty.

  13. Iamthe50percent says:

    1) When do the fundamentals trump Fed liquidity? 2) What will the Fed do in response to a falling market?

    1) Never. The market keeps rising although the economy sinks. This happened in Weimar Germany. When the mark finally stabilized (Rentenmark replaced Reichsmark), the market was higher than at the end of WWI, but had lost 75% in real terms, nevertheless the raw index was up. That wasn’t so bad seeing as how bonds had fallen a trillion to 1.

    2) The Fed will keep pulling the lever just like the Japanese Central bank. Perhaps even paying banks to take loans like they did. Borrow a billion, pay back 990 million.

  14. Old Rob says:

    Nothing new here. Same information as the April 10th post only S&P instead of commodities.

  15. b_thunder says:

    1) When do the fundamentals trump Fed liquidity?
    A: Soon. NYT reported that for 2010, 93% of all income gains went to the top 1%. How long can such “recovery” continue? How much can a rapidly shrinking middle class in the USA 9and even more so in Europe) support the consumer-based economy?

    2) What will the Fed do in response to a falling market?
    A: Buy treasurys! But when that fails – Fed will buy S&P 500 futures, then AAPL, then “blue chips,” then the mid- and small-caps.
    Fianlly, after a long and protracted battle with Google and Facebook, the Fed will buy Pinterest (before they go public) with a valuation of at least $2000 per each “active” user (aka $1000 for 1 eye-ball using 1999 lingo) and an ETF composed from Chinese reverse IPO shell companies.

  16. rd says:

    On an inflation-adjusted basis, every Fed intervention since Greenspan’s refusal to see a bubble in the late 90s has had less and less impact.

    Greenspan did nothing and the market went up until it imploded out of sheer extravegance in 2000. He then put his foot onto the monetary accelerator and refused to regulate banking activities that led to the housing bubble and 2008-2009 financial crisis (related bu not the same thing).

    Bernanke then did ZIRP which stopped the freefall and then attacked short-intermediate T-rates with QE1 which led to the 2010 peak. His repeated QE efforts have led to repeated market advances. However, the inflation adjusted peaks all show a steady downward trend since 2000. I think we are coming to the point soon where the
    Fed’s efforts have little effect, primarily because people are starting to believe that the Federal fiscal debt and the Fed’s monetary debt are becoming unsustainable in the long run. We are seeing Operation Twist simply maintain a floor on 10-yr yields, but not drive them lower since the first month or two.

    We are already seeing the muppets in their 50s and 60s pulling money out of equity mutual funds and dramatically reduced volume despite the ascendency of HFT. At some point in time over the next couple of years the pros buying on margin will probably not be sufficient to keep the balloon inflated. Bernanke handing more money to them won’t help sustain the “permanently high plateau of asset values”, although he should be able to still help stabilize the floor. Fiscal rectitude by Congress and the states later this year and next year, peaked corporate margins, along with European dismal news will probably tank the market late this year or next year. The Fed’s horses and king’s men probably won’t be able to put it back together for a while.

  17. Hurricaner says:

    why should the Fed act on a falling stock market at all?
    Used to be the stock market was the predictor of where the economy was heading…but now, thanks to hedge funds and other financial terrorists, the market is the driver of where the economy is headed. want more Fed action….tank equities. Start calling for a recession, tank equities….people hear the evening news, and start acting like we are in a recession. Somehow, the connection needs to be broken….but who wants to let them take the market down to 700 on the S&P again?

  18. eliz says:

    Every effort will be made to continue the largest transfer of wealth from the have-nots to the haves until there is nothing left to pillage.

    Killing the Fed and Limiting-TBTFs (financial and otherwise) was something that should have happened long ago. It is too late now, “the small people” will pay the price for their ignorance and apathy.

  19. Petey Wheatstraw says:

    I was going to post this comment in the earlier thread, but as I’m not currently involved in stock trading or “investing,” I decided not to. Seems appropriate for this thread, and tangentially related to the last one:

    Never bet on a horse that needs an injection of methamphetamine directly into its heart to win races.

    If you need to “invest,” in horse flesh, invest in a workhorse. Stay away from the race track.


    Correlation and causation aren’t mutually exclusive. Correlation can imply causation, or not — it can’t prove or disprove it. Over the long term, only a fool would ignore the repeated correlation of two things as not being cause and effect.

  20. bear_in_mind says:

    @Hurricaner said: “…but who wants to let them take the market down to 700 on the S&P again?”

    That’s an excellent point. Unfortunately, no one wants to see the punchbowl taken away from the market, especially the Trust Fund set.

    But Americans citizens need Tim G. and Ben B. to answer this question: how long they can maintain this parlor trick — and at what cost?

    I guess we can check back in the year 2020 to find out…

  21. 4whatitsworth says:

    Hmm.. Fundamentals? Do you mean hard work, honesty, integrity, loyalty, education, and minding our own business?

    Or do you mean print money to buy votes and have a big ass military so no one messes with the great American Ponzi scheme?

  22. blackjaquekerouac says:

    the Fed has absolutely NO impact on equity prices…though of course the charts make it look so. What they have had is a tremendous impact on the cost of money….which btw there is no guarantee that they can succeed in driving that cost down. As events have transpired however the debt markets have been so fearful that the mere mention of some type of “zero percent financing solution” has been enough to drive down rates. Twist of course did not add to the balance sheet…which is a helpful sign for weening the banks off of their addiction to public credit. but of course the Fed has no control over “forcing” the banks to lend to the private sector. Only the business cycle, profits, growth and confidence in public finance can “move that ball forward.” As events have transpired “so far so GREAT.” And yes i do believe we may have reached this stage of the recovery:

  23. gregory barton says:

    If QE is determining the level of the stock market why are banks and corporations awash with cash?

    “Droves of consumers and businesses unnerved by the lurching markets have been taking their money out of risky investments and socking it away in bank accounts, where it does little to stimulate the economy.”–PR_240419