Federal Reserve officials are committed to ending their latest round of quantitative easing (QE) by October. At that point, they will be holding more than $4.3 trillion of assets that they collected through various QE programs. So far, there is no word on a plan to unwind those positions.
The Fed began easing aggressively in 2008. A bull market in stocks began at that time and has continued as long as the Fed has been pumping money into the system.
While Fed policies have boosted stock prices, the economic recovery has been sluggish and is likely to remain that way. Economic growth is driven by consumer spending, which is driven by wage growth. Various government policies are holding down wage growth. Until wages grow the economy is likely to remain stuck in neutral.
The Fed faces an unprecedented set of problems and is largely powerless to spur economic growth. After spending more than $4 trillion, all they have been able to do is prevent a depression.
Investors need to consider the Fed's plan of action. With no tools left to spur growth, the economy will remain sluggish until government policies encourage employers to hire, an event unlikely to occur until 2017 when the next president rescinds at least some executive orders.
Stock markets have followed the path of the Fed for the past six years. Prices soared as the Fed eased. With the Fed set to stop easing, prices are most likely going to stop soaring. Now is a good time to prepare for a stock market pullback.
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