The Federal Reserve is the opioid crisis of the stock market

· February 6, 2018  
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Money pile
Valeriya | Getty Images

Early Friday morning, the Bureau of Labor Statistics announced a better-than-expected jobs report, including the news that wages grew faster last year than at any point since the end of the recession. The stock market responded by plummeting on Friday and then suffering a 4.6 percent decline on Monday. The S&P lost 4.1 percent, the worst single-day decline in seven years. What gives?

While there are numerous tangible and intangible factors that affect any market trend, the looming hand of the Federal Reserve acting to fix its previous mistakes cannot be denied. What comes up must come down, and in the case of the monetary manipulation from the unelected “god of our economy,” all of the monetary morphine that the Fed used to juice up the equities market during a bad economy is now going to hamper the stock market during the best economy in years.

Despite the robust economic growth and the positive news on almost all economic fronts, or more precisely because of the positive news, the market is tanking. The impending fears that the Federal Reserve will finally restore interest rates to their historic average after a decade of near-zero interest rates is pushing up bond yields and sending stocks into a tailspin. Thus, ironically, the better the economic news, the greater the fear that the Fed will feel it’s safe to finally raise the federal funds rates above the existing 1.25-1.5 percent target. Much like opioids have ensnared so many Americans into addiction to treat pain, the Fed’s irresponsible asset bubbles of the past decade have permanently hooked the market on easy money.

While the stock market is always going to be something of a crapshoot and a psychological casino, particularly in this era of the internet and instant news and trading, policy makers should be concerned that the Federal Reserve can own our market system to this degree in the first place. There’s something fundamentally wrong when the 10-year Treasury yield can’t rise above 2.75 percent without fear of a market crash. Yet, much like a drug addict who will shut down without his daily dose of juice, the market system has become hooked on the monetary morphine (as former Dallas Fed President Richard Fisher called it) that should never have been administered.

Throughout the past decade, the Federal Reserve engaged in three rounds of quantitative easing, performed two rounds of “operation twist,” and artificially deflated interest rates to juice the stock market and allow government to grow by servicing debt on the cheap. In addition, they bought so many treasuries and mortgage-backed securities that the Fed’s balance sheet grew from less than $1 trillion before the recession to over $4.4 trillion. Now there is concern that precisely because the economy is so strong, they will flood the market by offloading the assets, a perception that is further fueling the market selloff.


There is enough volatility in our market system. Why should it all revolve around endless cycles of government manipulation and its counterintuitive consequences from an unelected body acting as judge, jury, and executioner of our economy?

Market-distorting monetary manipulations are no different from market-distorting fiscal policy from the government. This is how the statists have successfully dissuaded us from ever limiting government. “You really plan to pull the rug out from under such-and-such industry,” moan the forces of special interests, be it health care or the financial sector. The same applies to monetary policy. There is no reason why we should allow the Fed to use monetary stimulus in such an officious manner that the entire market would collapse without the monetary morphine, even during robust economic growth.

To be clear, much of the short-term news about the stock market is not nearly as bad as what is being reported in the media. The market was due for a correction, and bond yields inevitably had to rise to keep up with the economic growth. But the latest news should provoke lawmakers to get motivated once again to question the long-term effects of the Fed policies. They should audit the fed and explore ending the Federal Reserve’s dual mandate to focus on both price stability and maximizing employment … aka tinkering with the economy.

A version of the “audit the Fed” bill passed the House twice by overwhelming margins when Obama was president. Yet it has been blocked in the Senate by the establishment in both parties. The most recent version passed the House Committee on Oversight and Government Reform last March. President Trump expressed support for it when he was running in the GOP primary. It’s time to add this to the growing list of winning issues Republicans would be wise to promote.

The Federal Reserve should not be treated the way the political world treats the federal courts and be regarded as untouchable by Congress. We have enough lawless, unelected branches of government. It’s time to stop creating asset bubbles and misallocation of resources and return to a true organic equities market that reflects the economic realities of America. That will not happen until the Fed is brought under the checks and balances of the republic.


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Author: Daniel Horowitz

Daniel Horowitz is a senior editor of Conservative Review. Follow him on Twitter @RMConservative.