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It’s Official: The Federal Reserve Just Shot its Bazooka – And Failed

Last Updated September 23, 2020 1:40 PM
Ben Brown
Last Updated September 23, 2020 1:40 PM
  • The Federal Reserve just aimed its ‘bazooka’ at the financial markets and it failed.
  • Chairman Powell revealed a historic ‘QE infinity’ program, pledging to buy assets indefinitely.
  • After a quick pump, the stock market quickly erased the gains and opened lower.

This is it. This is the biggest weapon in the Federal Reserve’s arsenal: QE-forever. A commitment to buy assets at whatever price, with no end in sight .

It was supposed to be their ‘bazooka moment,’ to stabilize the markets. But the impact on the stock market vanished in a matter of minutes.

ES S&P 500 chart with Fed announcement
S&P 500 futures (ES) popped higher at the Federal Reserve’s announcement, but almost immediately wiped out the gains. Source: TradingView

The same thing happened right after the Fed’s emergency rate cut last week . The Federal Reserve is shooting blanks.

Federal Reserve QE: what does it mean?

Today’s announcement is a commitment to buy U.S. Treasuries and mortgage-backed securities indefinitely. The process, known as quantitative easing (QE) has been done before in the US, but typically with a defined figure or endpoint. This is an open-ended promise to keep the economy going .

It’s their bazooka moment… It’s their ‘we’ll do whatever it takes’ moment which should be a sign to financial markets and investors that the Fed will provide any and all liquidity necessary to support the economy through this period – Russell Price, Ameriprise Financial Services.

The move was approved unanimously by the Federal Reserve Open Committee (FOMC). In the same announcement, they revealed a Main Street business lending program and a commitment to keep credit flowing. Here’s the official wording:

The Federal Open Market Committee (FOMC) will purchase Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy.

Stock market disappointed

The Federal Reserve’s drastic action was intended to calm the markets. It worked for about an hour. After an initial spike in futures trading, the rally completely reversed and continued to bleed out.

In fairness to the Fed, it’s not their job to pump the stock market. Their mandate is to:

Promote maximum employment and stable prices, along with its responsibilities to promote the stability of the financial system.

The Fed is responsible for keeping inflation in check and employment stable. But investors were definitely hoping for an equities bump from this news.

As Chris Rupkey at MUFG Union Bank said, this is the Fed taking historic action .

Fed policy is shifting into a higher gear to try to help support the economy which looks like it is in freefall at the moment … The central bank is shifting from being not just the lender of last resort, but now it is the buyer of last resort. Don’t ask how much they will buy, this is truly QE infinity.

Federal Reserve out of ammo. It’s Trump’s move now

Jerome Powell and the Federal Reserve have officially shot every round in the gun. Their job is to provide liquidity and stop the engine from seizing up entirely. They’ve done their job.

President Donald Trump brags about a record stock market in 2019. His administration needs to stitch together a rescue plan for this year’s unprecedented crisis. | Source: AP Photo/Richard Drew

But they can’t pump life back into the economy as America goes into lockdown. That has to come from direct fiscal stimulus. The Trump White House and Congress must work together to pass a bill that puts money directly into the hands of people and small businesses.

The only hope of stopping the stock market bleeding lies with Congress and the multi-trillion fiscal package.