Impact of the 2008 Federal Reserve Actions

*Scarce Reserves vs Ample Reserves System* After the Global Financial Crisis, the Fed went from operating on a scarce reserves (or “corridor”) system to an ample reserves (or “floor”) system. Here’s how the two are different - Prior to 2008: The Fed actively used Open Market Operations (OMOs) to toggle with the Fed Funds Rate. OMOs shift the supply curve inwards or outwards therefore fintuning the FFR. Open Market Purchase >> Supply for Reserve shifts outwards >> FFR goes down Open Market Sale >> Supply for Reserves shifts inwards >> FFR goes up Until this point, a (relatively) small supply of federal reserve balances (<$50 billion) was good for banks to manage daily payments and for overnight funding markets to function. Post 2008: The Fed decided to go big. Large Scale Asset Purchase (LSAP) programs increased the total reserves to $2.8 trillion by 2014 - hence the word “ample”. And then there was no turning back. Ample became the new normal. The Fed’s new toolkit is 3 administered interest rates - 1. Discount Rate (the rate at which banks can borrow from the Fed) 2. Interest on Reserve Balances IORB (the rate at which banks can park their funds at the Fed in their reserve balance accounts)  3. Overnight Reserve Repo Rate (the rate at which non-bank finance institutions can do repo operations with the Fed). The primary tool here is the IORB - it sets a target ‘range’ for the FFR. Fed raises IORB >> It raises the target range for FFR.  Arbitrage ensures that the FFR never strays too far from the IORB. Through it all, the supply curve for reserves remains a vertical line. But as we go further down the demand curve towards the right, changing the supply curve barely influences the Fed Funds rate because it’s practically horizontal (the system is awash with liquidity). Does this mean that OMOs are no longer an effective policy tool? Yes. The administered rates (mainly the IORB) does the heavylifting. (In the chart below DR : demand for reserve balances, SR: supply of reserve balances) More reading - Claudio Borio at the BIS has an interesting paper titled ‘Getting Up From the Floor’ that you can read here https://lnkd.in/d274qqRd Watch this video by the St. Louis Fed - https://lnkd.in/dJqbrwAX #MacroWithMahima

Fed Rate Cut Impact When the Federal Reserve (Fed) cuts interest rates, the stock market typically experiences several notable effects. While the specific outcomes can vary based on the broader economic context and market conditions, the general trends are often observed as follows: Immediate Market Reactions 1. Positive Sentiment: A rate cut usually signals the Fed's intention to stimulate economic activity, which can boost investor confidence. 2. Increased Valuations: Lower interest rates mean that the present value of future earnings increases, as the discount rate applied in valuation models decreases. 3. Sectoral Impact: Financials: Banks and other financial institutions may face pressure on their profit margins. Real Estate: Lower rates can boost the real estate sector by making mortgages cheaper, thereby increasing housing demand and benefiting related stocks. Technology: Tech companies, often characterised by high growth potential and significant future earnings, tend to benefit. Medium to Long-Term Effects 1. Economic Growth: Sustained rate cuts aim to spur economic growth by making borrowing cheaper for consumers and businesses. 2. Inflation Expectations: If rate cuts succeed in boosting demand, inflation may rise. 3. Corporate Debt: Lower interest rates make it cheaper for companies to refinance existing debt and issue new debt. Historical Context and Examples 1. 2008 Financial Crisis: During the financial crisis, the Fed cut rates aggressively to near-zero levels. Initially, the stock market continued to decline due to severe economic uncertainty. However, as the economy began to stabilise, lower rates supported a significant recovery in stock prices, culminating in a prolonged bull market. 2. COVID-19 Pandemic: In early 2020, the Fed cut rates to near-zero in response to the economic impact of the COVID-19 pandemic. This action, combined with other stimulus measures, helped to stabilise the stock market after an initial sharp decline, leading to a robust recovery and new market highs later in the year. Caveats and Considerations 1. Market Expectations: The impact of a rate cut can be muted if it is already widely anticipated by the market. 2. Economic Context: If a rate cut is perceived as a response to deteriorating economic conditions, the positive impact on stocks might be limited. 3. Long-Term Rates: While the Fed controls short-term interest rates, long-term rates are influenced by market forces. In conclusion, while Fed rate cuts generally have a favourable impact on the stock market, the extent and duration of this impact depend on various factors, including investor sentiment, economic conditions, and the broader monetary policy environment. Investors should consider these dynamics and remain vigilant to the broader economic signals accompanying rate cuts. References Federal Reserve Historical Interest Rates Impact of Federal Reserve Rate Changes on Stock Market Economic Insights from Fed Actions

The Federal Reserve's misunderstanding of the 2007 crisis has only worsened inequality. They pushed quantitative easing, thinking it would save the economy. Instead, it inflated asset prices. Who benefits? The wealthy. Most people own minimal shares. They gain nothing. It's like giving a starving man a cookbook. Looks helpful, but doesn't fill his stomach. The Fed's actions have tightened the inequality rubber band. It's stretched to its limit. Ready to snap. When it does, the fallout will be severe. The rich will cushion their fall with their inflated assets. The rest? They'll hit the ground hard. This isn't just theory. Look at the data. Since 2008, the wealth gap has widened. The top 1% now hold more wealth than the bottom 90%. That's not a healthy economy. It's a ticking time bomb. We need real solutions. Not more of the same. Invest in infrastructure. Create jobs. Raise wages. These steps will help everyone. Not just the elite. Ignoring this reality is dangerous. The next crisis won't be kind. It's time to learn from past mistakes. And act before it's too late.