Although it has been dubbed “surprisingly hawkish” by the financial press, the Fed’s announcement today fulfilled its original plan to wind up QE3 asset purchases this month. Going forward, the Fed will continue to reinvest the principal on its maturing bonds, but it won’t add assets on net to its balance sheet.
In my view, if the Fed holds firm and doesn’t resume asset purchases, we will have a sharp drop in stock prices, as they have moved in lockstep with the Fed’s balance sheet since 2009:
Let me also remind readers of my analysis back in July, when I explained why I thought Janet Yellen was going to take one for the team:
==> Paul Volcker took over as Chair of the Fed in August 1979. A recession officially began five months later, in January 1980. The second “early 1980s” recession officially began in July 1981; the annual unemployment ratewas 9.7% in 1982. This was the worst recession since the Great Depression.
==> In February 2006 Ben Bernanke became Fed chair. The worst recession since the Great Depression officially began in December 2007, and you may recall there was some trouble in the financial markets in September 2008…
==> In January 2014 Janet Yellen became Fed chair. The US stock market crashed and slipped back into major recession on _____?
Of course, no one knows the future. But given that the people behind the curtain have to let a major crash happen sometime–they can’t repeal Austrian business cycle theory–why not do it when the first black president is in the White House and the first woman is at the helm of the Fed?