The No-Fail Fed
Past performance is no guarantee of future returns;
this is NOT investment advice and is meant to be educational in nature.
“Earnings don't move the overall market; it's the Federal Reserve Board, focus on the central banks and focus on the movement of liquidity, most people in the market are looking for earnings and conventional measures. It's liquidity that moves markets.”
— Stanley Druckenmiller
asset prices, monetary policy, Embrace the System!...
The Federal Reserve is one of the most powerful financial institutions in the world. Since its creation in 1913, its influence has grown to shape the entire global asset-pricing ecosystem. Every major asset class stocks, bonds, real estate, credit is touched by Fed policy. In crises, the Fed not only controls the money supply but determines who receives liquidity and on what terms. And because asset prices rely on discounted future earnings, the core variables in that equation the discount rate and the monetary stance guiding expectations are ultimately set and signaled by the Fed.
"The Bank’s power comes from a Federal dual mandate: control inflation and guide the economy to full employment without overheating. It is a delicate balancing act, where every policy move signals both risk and confidence to the markets.
and the system?...
The Fed guides the US economic system toward its objectives and, in moments of crisis, uses every tool at its disposal to stabilize markets, backstop liquidity, and signal confidence. Its influence over the past 25 years is undeniable, and regardless of the actual long-term implications.
embrace it?...
Since 2009, the Fed has reshaped the financial system through massive monetary injections, removing impaired assets and stabilizing credit to restore the flow of capital. By shaping expectations and market probabilities, it influences how investors allocate resources and creates conditions that favor owning publicly traded assets. Owning risk assets isn’t a bet on certainty, but it is a rational alignment with the system and the environment in which value is created.
The world economy collapsed in 2009 and again in 2020, each for very different reasons. In both cases, the Fed injected trillions of dollars into the system, resolving liquidity crises, stabilizing banks, and re-inflating asset values globally effectively preventing a full economic collapse.
... Fed provides liquidity; problem solved... right?
Summary:
I’m not naïve to the distortions of centralized planning, nor do I expect the Fed to prevent every bear market. But we operate in a system where asset values and risk-reward dynamics drive growth, and asset appreciation fuels the wealth effect. I also believe Fed intervention is still in its infancy future shocks will come, but in extreme uncertainty, the Fed has shown it will act decisively to stabilize markets and the broader economy.
Whether you see the current system as logical or irrational, supporting asset prices is essential for sustaining both current and future economic growth, the Fed knows this...
so, embrace it... in an appropriate capacity for your risk tolerance and financial goals and objectives...
My job as an advisor, is to help you interact with a volatile and seemingly irrational economic system, in an effective and unemotional way. Risk tolerance will always be considered prior to making any investment recommendation.
Schedule a free, 30-minute, no-pressure, NO BS, introductory financial planning consultation with Fountainhead Wealth Planning.
Brett F. Anderson, CFP® CIMA® CAIA® M.S. Econ
Do you have questions? I'd like to help. Please call me at (864) 790-3385.