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Jonathon Trugman

Jonathon Trugman

 Business

Federal Reserve still bonded to its $4T

By
Jonathon Trugman
Published Sep. 21, 2014, 4:21 a.m. ET

Central bankers across the globe appear to be doing the wave — seen in stadiums across the world — when it comes to injecting cash into the financial system.

Just as Janet Yellen and the Fed are about to sit down with only $15 billion a month left in its bond-buying program, the Japanese, the ECB and now even the Chinese central bank have Yellen’s back.

If you think the timing is a little interesting, so do I. Global central bankers are known to be quite fond of working together.

What does this mean for stocks? Nothing changes.

On the same day that Yellen announced the latest taper, equity exchanges hit all-time highs.

Quite a contrast to the dire stock selloff that was forecast some months ago when the taper began.

By all measures, the Fed plans to be out of the bond-buying business, known as quantitative easing, in just a few months. It could do it in one fell swoop at its next meeting in October, or wait until December. Either way, it’s done, it’s over and, I hope, never coming back to our shores.

After all, QE has done very little for the economy, except to help levitate stocks in an effort to gloss over the reality of the shortcomings of a weak economic recovery.

That said, it sure has made stocks pop. In fact, the S&P 500 is up over 70 percent since the end of 2010.

However, with a balance sheet of over $4 trillion now, which is about 25 percent of our economy, the Fed had to stop here. But make no bones about it, it is not planning to scale back the size of its balance sheet.

In a wink and a nod to other central bankers and stock investors, Yellen at her press conference on Wednesday said it could take “until the end of the decade” for the Fed balance sheet to normalize in size.

Translation: The Fed will not sell its bonds and work against its cohorts in other central banks, it will simply let them come due and mature.

Well, this was music to the market’s ears, pushing the S&P over 2,000. Because as the Fed steps back with plans to wait a “considerable time” before hiking rates, it improves the outcome considerably for equity investors for some time.