The FED is Driving the Markets but Who is Driving the FED?

On Monday, the FED announced that it would be buying individual corporate bonds in addition to Exchange-Traded Funds (“ETFs”).

We had seen the European and U.S markets in meltdown mode before managing to claw their way back through the day.

Concerns over a jump in new COVID-19 cases across U.S states recently reopened had weighed on risk appetite.

We had also heard of a cluster in Beijing that led to a quick response by the Chinese government. The Chinese government will be eager to thwart another breakout.

If Monday’s moves are anything to go by, then it is the FED and not COVID-19 that will have the final say.

FED Independence

The timing of the FED’s latest move is poignant when considering that FED Chair Powell gives testimony to lawmakers today and tomorrow.

In FED Chair testimonies of the past, the likes of Yellen had to frequently protest the FED’s independence from the administration.

If we consider the FED’s actions over the course of the current year, however, perhaps this question of independence will be raised once more…

Last year, the U.S President continued to demand zero rates from the FED and frequently chastised FED Chair Powell.

This year, we have seen the FED chop rates to unprecedented levels. Granted, the COVID-19 pandemic was the cause but one wonders whether Trump finally has Powell’s ear.

We have since heard the U.S President demand negative rates… Until now, the FED and the FED Chair have quashed the notion of negative rates.

When considering the likely path of the economic recovery, however, and where rates currently sit, it is not as farfetched as some may think.

Of greater significance must be the FED’s support of the U.S equity markets on Monday.

Jumping into individual corporate bonds that can include bonds that have been downgraded to junk, as a result of the pandemic, was a surprise for the markets.

The bigger question is whether the U.S President had a hand in the FED’s latest move to deliver support.

Throughout the U.S President’s 1^st term, we have heard countless references to the performance of the equity markets. This may even prove to be Trump’s legacy, assuming that there is not a meltdown before November.

Now that the FED has made its bed, it is going to need to lay in it. Does that mean that investors can just jump in with the knowledge that the FED is there to cushion any blow?

FED Chair Testimony

FED Chair Powell’s testimony to lawmakers today will garner plenty of interest and will dictate risk appetite.

We may even see lawmakers press Powell on the FED’s independence from the U.S administration. Powell will certainly stand his ground should this unfold but the seed will have been planted.

It will make for an interesting session. Last week, Powell spooked the markets during the FOMC press conference. On Monday, we got the nod to buy more U.S equities, which begs the bigger question. What does Powell have in store for us later today?

For some, however, the bigger question may be… Who is driving the FED?

At the time of writing, the Dow Futures was up by 430 points, with NASDAQ up by 113.25 points. Trump would certainly relish seeing the NASDAQ break back through to 10,000.