Thursday, May 3, 2012

Effectiveness of Fed Intervention Diminishes

To me, the above Bloomberg chart shows pretty starkly that the Federal Reserve's interventions in the stock market (er ... economy, that is) are becoming less effective each time they're tried.  The three Fed programs to date (Quantitative Easing 1 in 2010, the green line, Quantitative Easing 2 in 2011, the black line, and now Operation Twist, the orange line), and their effect on the S&P 500, look like nearly perfect overlays, except for two things; QE2 crashed more precipitously and earlier than QE1, and ultimately recovered to a lower level than QE1.  This begs the question "will Operation Twist run out of steam this month, and lead to a market crash of its own?"  Of course, this is an election year so the Plunge Protection Team will be pulling out all the stops to prop up the market legally and otherwise, but it's hard to see how they can continue to do so (without actually falsifying manipulating government data releases) with the Fed apparently losing its effectiveness.  And for all you QE3ers out there, beware - there is a declining cost-benefit relationship to these interventions.  Be careful what you wish for (especially if you own equities), you might just get it.  Get ready for another "buying opportunity".