The Fed has two weapons at its disposal in setting monetary policy and controlling asset markets. The first is jaw boning and the second is actual action like raising or lowering rates etc. In one of Ben Bernanke’s blogs he cheerfully admits that 90% of what the Fed wants to get accomplished occurs through jaw boning the markets. Well I guess the Fed decided to halt the slide of the markets today and they trotted out “The Bullard”, as the traders like to call him. You may recall that Bullard made an appearance in October 2014, as the market was cratering, and put QE back on the table. The Market bottomed that day and a V shaped rally ensued for 6 weeks. Today Bullard came out and walked back the rate hike talk using the low price of oil and lack of inflation as the excuse.
What is extremely important is to realize that if this rally fails in a few days or a week and we roll over then the Fed has lost a very important tool in their tool box and that is jaw boning. In 2008 Bernanke lost that tool and then he had to resort to rate cuts as the markets imploded and eventually those didn’t even work either. Basically if we go to a new low this will be the first sign that the Fed has officially lost control and then it will likely become apparent to many market participants that the train has left the station and stopping the train will require extra ordinary measures. The problem banking on these measures is that they are likely to occur from much lower stock prices and will be tough for the Fed to do in an election year. This next rally is extremely important and will be a tell for us as to whether or not the Fed still has the confidence and control that so many of you have come to expect. My bet is no they don’t and that much lower stock prices are already baked into this deflationary cake. If we don’t V and go to new highs very soon then look out below.If you enjoy the content at iBankCoin, please follow us on Twitter