Last month’s rescue of the overnight lending market by the Federal Reserve Bank seems to be having unexpected effects: the stock market is being boosted.
The overnight lending rate spiked in September breaking the financial market’s plumbing as banks and other financial institutions began to run out of money. Acting a plumber, the Fed Bank decided to rescue the situation by pumping in more money, loads of it.
Other than the cash injection, the Fed also promised to purchase more bonds, again, lots of them. Months after shrinking its balance sheet, the policymaker swore to purchase $60 billion worth of Treasury bills each month until September next year.
After the spending spree, the Fed’s balance sheet swelled by about $286 billion since September this year, to $4.05 trillion this month.
But the Fed has come out clearly to affirm that their actions did not in any way mean that they were avoiding a case similar to the 2008 crisis-era bond-buying program which aimed at boosting the markets and stimulating the economy. The said that their current undertaking was only meant to be a technical fix.
And the fix is indeed working – Borrowing costs are now back to normal.
While the Fed did not intend to boost the stock markets, its actions have been impacting the market quite positively.
“I don’t even think it’s debatable,” Danielle DiMartino Booth, a former Fed official who is now CEO of Quill Intelligence stated. “It’s patently obvious that the Fed’s intervention into the market is having a huge effect on the stock market.”
Morgan Stanley’s chief investment officer Michael Wilson also agreed, saying the Fed’s decision to expand its balance sheet is “helping further loosen financial conditions in an effort to boost growth.”
However, the boost that is being seen in the stocks market may not entirely be a result of the Fed’s injection of additional money.
The US stocks market has been riding on the hope of a deal between China and the US. If the deal goes through, the months of a trade war between the US and China could bring to an end the uncertainty that has been haunting the market.
Experts say the market has also eased due to a report that indicated that economic expansion could endure recession fears.