The primary mechanism is obvious to all: whenever the equity market falters, the Fed unleashes a flood tide of liquidity, i.e. fresh currency, that rushes into the market at the top-corporations, banks and financiers-because the Fed distributes the fresh liquidity solely into the top tier of market players.
The Fed's willingness to "Do whatever it takes" time and again has created a feedback loop that has expanded the influence of the market on the economy and the Fed's influence on the market, to the point that the market is now keyed to every Fed utterance and policy tweak.
The market rallies on the expectation of Fed pauses, Fed easing, Fed bank bailouts, and so on: every Fed action sparks a rally because everyone knows there are no limits on what the Fed will do to further inflate the equity market.
The more liquidity the Fed pumps into unproductive speculation, the more it stokes inflation, which is driven by expanding the flood tide of currency and credit without actually boosting productivity.
So speculators are piling in on the Pavlovian expectations that the Fed will push interest rates back to near-zero and continue to find new ways to unleash new flood tides of liquidity: Dow 100,000, indeed.
The echoes of 1929 abound, but nobody's paying attention because speculative extremes have been normalized by 15 years of Fed policies.
The 1970s offers a roadmap of how belief in the omnipotence of the Fed and the permanence of Bull Markets fades.
https://charleshughsmith.blogspot.com/2023/12/the-feds-empire-of-speculation-and.html
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