How Bulls and Bears See Fed Policy

Bearish investors look at the chart below and immediately notice that Fed intervention in the form of QE1 and QE2 (quantitative easing program 1 and 2, or perhaps more accurately, money printing programs 1 and 2) occurred after substantial market declines. QE1 is announced after the Lehman Brothers collapse in 2008 and QE2 is hinted at when Bernanke addressed the Jackson Hole conference in the summer of 2010 (after we learned of the Greek debt problems). Given that last week’s news regarding fourth quarter GDP was somewhat disappointing, bears would warn risk takers not to count on the Fed to announce a new QE3 program that would support the equity markets until after the next major stock market correction, or bear market. In addition, the magnitude of the impact of the Fed announcements on the market seems to be diminishing. The market move during QE2 was less than QE1, and the subsequent policy shifts have had less impact than QE2.