The Fed. Monetary policy. Fiscal policy. CARES Act. Helicopter money. Donny money. Universal basic income. My favorite is Donny money. Makes me laugh every time.
These are things I have been pondering during the past 2 months of this pandemic-lockdown-COVID-19 unprecedented event. Unprecedented. Anyone else tired of hearing that word? I like to think I’m a pretty level-headed person. My first instinct when pondering the whys in life is logic. I am not super emotional. But then the lockdown hit. Then I became an unintentional homeschooler while trying to work from home. I know many parents found this one difficult. My sister is still doing it with a spunky 4-year-old, back-to-back WebEx meetings, all in 1200 square feet of house. My lot did not seem so difficult with our 3 somewhat older kids. I still might have dispensed with logic as my go-to for explaining reality. At least for a spat.
With the extreme market volatility in February and March, it drove me to ponder, “What is really going on here?” To stem my own anxiety, I went into full-on research mode. I was on websites I’ve never heard of before that linked to other websites. At times, I felt like Alice down the rabbit hole. That feeling failed to stop me. For whatever reason, I didn’t follow the pandemic as intensely. What piqued my curiosity was the markets and then “The Fed.” The Fed or the Federal Reserve System of the United States controls monetary policy. Congress controls fiscal policy. Those are two of the driving factors in our economy.
For a brief explanation of that, check out Ray Dalio’s video about the U.S. economy. When I wrote our May 2019 blog post, I still felt a bit like Ray’s view of the economy was a little off. I wasn’t quite sure why at the time. I knew it was something about the Fed funds rate and the Fed’s effect on the economy that had me reticent. After going down the rabbit hole of the world wide web for a month straight, I finally came upon the information that I felt was the missing piece. It was how things work behind the scenes with the Fed, their overnight Fed funds rate, the repo market, and the mysterious bank reserves. I was fascinated. And I read. And read some more. Then I might have become a bit obsessive reading late into the night when I should have been sleeping.
I will dispense with the details as I’m sure I’d bungle it and you’d wish I had stopped writing already. If you’re interested in some of the podcasts and articles, send me an email and I’ll direct you to those. The result was that I finally started understanding how the Fed’s actions during the pandemic and currently were truly impacting our economy. Since the overnight Fed Funds rate theoretically can’t go below zero, they had to find another way to help the economy. Yes, there’s negative interest rate talk as Japan has had those for a while now, but I’m going to ignore that for this discussion.
What did The Fed do since they couldn’t decrease the rate any further? They started buying securities. Securities is a general term for an investment vehicle, ie: equities (stocks), corporate bonds, ETFs, futures, options, and REITs. Why would The Fed buy securities? There were a lot of sellers and not enough buyers which made the prices drop in a precipitous fashion. To stabilize the market, The Fed stepped in and became the buyer. This is an oversimplified version of The Fed’s quantitative easing. If you want to join my world wide web rabbit hole, you can find a plethora of interesting commentary on the constitutionality of the Fed buying these securities. Armed with this info, the monetary policy and its effects finally made sense to me. I understood how the market stabilized in spite of the unemployment numbers and dropping economic numbers. I was surprisingly grateful. Grateful for my less bad personal rate of return in my 401(k).
Two economists that all of us here read are Brian Wesbury and Robert Stein, Chief Economist and Deputy Chief Economist, respectively for First Trust. In this article, they say it much better than I can.
“… these days Quantitative Easing by the Federal Reserve is going straight into the M2 money supply and not into excess reserves. In the past three months, M2 has climbed at a 66% annualized rate, the fastest rate we know of in history. Meanwhile, the federal government has ramped up deficit spending (with unemployment insurance and loans/grants to small businesses) to try to offset private-sector losses in income. Regardless of what we think of these policies, the effect will be to support equity prices in the year ahead.”
M2 is just an economic measure of the money supply that includes cash and checking deposits (M1) as well as something called “near money.” And yes, there’s an M1 and M3 too.
So, what can we do with this information? And as Jim likes to say, “What in this intel is actionable?” I think we might watch too many Jason Bourne movies. And he might have been annoyed with my late-night obsessive reading. Depending on your opinion, this intelligent information might be actionable. For me, it’s mostly a so now you know result. It helps me make sense of what I’m reading and experiencing, and it helps me avoid panic and the bad decisions that panic makes. I loathed watching my personal rate of return in my 401(k) hit -25% on March 31st as much as everyone else. I made a few changes and continued to live my life, replete with new job title of Unintentional Homeschooler and three awesome elementary and middle school aged co-workers.
We’re all in the same storm. We are just in different boats. I like to think that as enterprising human beings, we’re in this together and that’s how we’ll get through it—together.
* Cover photo courtesy of Nicole Baster on Unsplash
The views expressed are those of the author as of the date noted, are subject to change based on market and other various conditions.