Behind Market Selloff: Fed ‘Taking Punch Bowl Away’

April 4, 2012 by · Leave a Comment
Filed under: Stock Market News 

You have to appreciate the honesty in headlines like this.   It highlights that this current rally or recovery in the markets are in most part due, to the massive stimulus our central bank as provided through bond purchases and historically low interest rates.

Correspondingly, it makes sense that without that assistance that markets prices would drop lower with the potential reality of that not being available.  I believe without the unprecedented support the Federal Reserve and U.S. Treasury has provided, we will resume natural deflation to bring asset prices across multiple classes back to a level that can be sustainable with the available credit & money to support them.   This will be look down upon from most mainstream economist and commentators but in the end it will be the most sustainable path forward and as such, it should be looked to as positive development.

CNBC – Stocks were headed for their worst day in a month Wednesday after the Federal Reserve signaled that it may be less willing to provide more stimulus to the U.S. economy.

The Fed’s policy makers were encouraged by recent reports of job growth in the U.S. and seemed more willing to allow the economy to move forward on its own.  The Fed’s signal came at a time when investors have become increasingly worried about the global effect of a recession in Europe and the ability of countries there to make large debt payments that are coming due.

“The punch bowl is being taken away by the Fed and the ECB and the markets don’t like these punch bowls being taken away,” said Doug Cote, chief market strategist with ING Investment Management based in New York. “But it’s all part of getting back to normal. It’s a sign that we don’t need artificial stimulus, so I think the selloff is temporary.”
Minutes from the Fed’s last meeting, released late Tuesday, started a sell-off that began in the U.S. and extended overseas.  Ever since the financial crisis and deep U.S. recession, governments have worked actively to prop up economies damaged by the global downturn.  The government stimulus is one of the key reasons behind large market rallies from the lows they hit around three years ago.  Central banks around the world, notably the Fed, have provided big injections of money into the financial system.

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