Federal Reserve‘s “endless QE” cheers markets

America's Federal Reserve has slashed interest rates and launched unprecedented bond-buying programmes that stretched its mandate to its limits. More could be in store next year.

The post-election stockmarket is a “Labrador”, writes Ben Wright in The Daily Telegraph. Like the dog breed, it is proving “monomaniacally cheerful irrespective of circumstances”.  Global markets had perked up in the days before the US election; polls suggested a Democratic blue wave would open the way for a $2.2trn stimulus package. 

Yet when it became clear that Florida and Texas would not be painted blue, markets didn’t retreat. Instead, they decided that a Biden White House combined with a Republican Senate was what they had wanted all along. As the world waited for a final election call, the S&P 500 gained 7.3%, its best weekly performance since April.  

A Biden White House with a Republican Senate is good news for US stocks, Andy LaPerriere of Cornerstone Macro told Barron’s. The Senate will block Democrat tax hikes on business, while a Biden administration should bring greater calm on the trade war front. The idea that divided government is good for equities is something of a Wall Street cliché. Yet there is little evidence for the idea that it is best when opposing parties are in Congress and the White House, says Paul Vigna in the Wall Street Journal. Since 1928 “there has been virtually no difference in the annual return of the S&P 500” between years with united and divided governments. If fact, stocks “slightly outperformed” when the executive and the legislature were in the same hands.  

The almighty Fed 

British stocks managed an even more impressively Panglossian feat, notes Philip Aldrick in The Times. The FTSE 100 gained more than 6% last week despite the small matter of England returning to a nationwide lockdown. In a world where fresh quantitative easing (QE)is always available, “bad news is no longer bad news… because policymakers won’t allow it”. In 2008 the banks were “too big to fail”, now that is true of the entire market. Central bankers won’t admit it openly, but there is a “price floor for assets… Call it market welfare for financiers”. The Federal Reserve last week agreed to keep interest rates at between 0% and 0.25% and continue its monthly purchases of $120bn-worth of bonds and mortgage-backed securities with printed money. The Fed’s balance sheet has soared from $4.1trn before the pandemic began to $7.1trn today, equivalent to 34% of 2019 US GDP.  

Federal Reserve chairman Jerome Powell has done more than any politician to stabilise the markets this year, says Nicholas Jasinski in Barron’s. In the spring he slashed interest rates and launched unprecedented bond-buying programmes that stretched the Fed’s mandate to its limits. More could be in store next year. For investors, it is Jerome Powell, not Joe Biden, who is the man to watch in 2021. 

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