Is the stock market basically at the mercy of the US Federal Monetary Policy which will turn on a dime wheneve

Question

r it wants to without warning?

Answer 1

It's very simple!
US Currency goes down - Stocks go up!
Foreign investors lose interest - Stocks go down!
Fed lower interest rates - Stocks go up!
With interest rates down - foreign investments go down
Now we are in a pickle - we owe Mega Money to the world, the Dollar is getting worthless, we are tied up in two money gobbling wars and Bush is an idiot.

Answer 2

Not usually.

The US market structure is usually pretty flexible. As such, actions by the US Federal Reserve Board actually don't matter. Right now, some markets have become rigid. As such, the activities of the Fed suddenly matter a lot.

The Fed's job, normally, is to maintain the stability of the national price level. Right now it has opened the "discount window" to improved borrowing. It is only open to Federal Reserve member banks and it is only for emergency borrowing. So the Fed has opened the liquidity tap for emergency borrowing only. A bank finding itself suddenly without the cash to maintain operations can borrow through the discount window to get enough cash to stay afloat until the money markets stabilize.

The Fed also will not accept subprime loans at the discount window as collateral, so it has also said it will not fix the markets' problems. It will prevent a meltdown, but people are going to lose a lot of money and the Fed is going to let them do it.

Answer 3

Yes.

That said, this action by the fed was extremely unusual. The market is pretty good at guessing what the fed is going to do, and as long as the fed does what the market thinks, it doesn't add volatility.

When the fed surprises the market, stuff happens.

-->Adam

Answer 4

YES