The Fed Tapers

…and the stock market shoots up.  QE was supposed to be propping up the market, driving it even; heretofore, whenever the Fed mumbled that it was maybe thinking about beginning to taper sometime in the vague future, the market tanked.  What’s up with the hard increase?  John Malkin at AEI suggested three reasons for that.

These reasons center on the fact that the Fed is continuing its monetary easing through other channels (the Fed Funds rate and a lowered unemployment rate threshold); the now fact of tapering reduces uncertainty about the Fed’s actions; and the fact that the Fed actually has been buying $94 billion in bonds monthly this year (not the advertised $85 billion), and no one noticed the drop—the $19 billion reduction was perceived as the advertised $10 billion, so the taper size seems to be no big deal.

To those, I’d like to add a fourth reason, and a warning.  The reason is this: the fact that the Fed actually has begun easing is taken as its advertised criteria for doing so having been met and will continue to be met in the nearby future.  This perceived confidence in the economy’s recovery by the Fed is viewed favorably by the market.

The warning is this.  Malkin opened his article by tacitly pooh-poohing a QE-induced market bubble.  Comparing market performance with actual economic performance, it seems clear to me that a bubble was generated.  Comparing the current market to the current underlying economy, it seems equally clear that the bubble is merely extending in that perception-based optimism.

In the end, the economy will catch up with the market.  Or the market will fall back to the economy.  Heads up.

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