Tags: Barclays | Fed | stocks | market

Barclays: US Can’t Avoid Fed-Fueled Market Drop

Wednesday, 21 March 2012 07:24 AM

Stocks are going to fall due to the secondhand effects of the Federal Reserve's loose monetary policies, Barclays U.S. equities strategists Barry Knapp and Eric Slover conclude.

Stock prices have soared thanks to Federal Reserve policies of buying assets from banks, a tool known as quantitative easing that floods the financial system with liquidity and lowers interest rates.

The Federal Reserve has rolled out two such rounds since the downturn, and market talk says another round can't be ruled out.

Editor's Note: Meltdown on Main Street Coming, Prepare Now

To further goose the economy, the Federal Reserve has also reshuffled its portfolio of Treasury holdings, stocking up on long-term instruments and selling shorter-term securities to push long-term borrowing rates down and fuel investing and with it, hiring.

The Fed will have to step back eventually, and either way, that means stocks will take a dive.

If the Fed does not roll out further easing and lets its reshuffling policy expire, fears of tighter policies will build and without further Fed support, stocks will fall.

If the Fed does intervene, fears that economy remains weak will erase optimism that lukewarm but surprisingly positive economic indicators have had on the market, and stocks will fall anew.

The end is a "heads I win, tails you lose, scenario," Knapp and Slover write, according to Business Insider.

"In other words, if growth softens, stocks go down; if the Fed doesn’t ease investors will worry about monetary tightening and stocks go down as well."

Federal Reserve Bank of New York President William Dudley said recently that further quantitative easing, known widely as QE, can't be ruled out.

"Nothing has been decided," Dudley said, according to Reuters.

"It all depends on how the economy evolves," Dudley said, adding "it's about costs and benefits, and if we get to a point where we think the benefits of another program of QE outweigh the costs, then we'll certainly do so."

Editor's Note: Meltdown on Main Street Coming, Prepare Now

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Wednesday, 21 March 2012 07:24 AM
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