That is the question many investors would like answered. How one answers this question has important implications regarding the arrangement of a portfolio. If you believe the Fed will continue, then financial assets may hold their current range. If you believe the Fed will step aside, then financial assets are likely to drop, perhaps plummet.
Graham Summers provides his opinion:
This confirms what I’ve been saying for months: the Fed has realized that the consequences of QE (higher cost of living) outweigh the benefits. This is why the Fed only decided to extend its Operation Twist program during its June FOMC: the political climate in the US will not tolerate a large-scale move by the Fed unless a major bank collapses or some kind of systemic risk hits.
This means… that the primary prop underneath the US stock market and financial system (namely Fed intervention) is slowly being removed. What follows will not be pretty and smart investors should be taking steps now to prepare in advance.
Mr. Summers is insightful, but on this particular issue I respectfully differ. Mr. Summers’ points contain the reasons why I believe the Fed will take more action. He expects that we are already, or shortly will be, in another recession. For obvious political reasons, he does not believe that government will declare that fact until after the November election because it would highlight a number of embarrassing conditions:
- The first time in the post-war period that the US has entered a recession in which industrial production failed to exceed its previous peak
- The first time the US entered a recession when average unemployment duration was already at record highs
- [T]he civilian employment-population ratio is at levels not seen since the ’70-’80 (meaning that fewer and fewer Americans are in the workforce)
- [A] recession in which food stamp usage is already near record highs