Tags: Fed | Fisher | Bullard | stocks

Economist Jeffrey Dorfman: Fed Policy Has Turned the Stock Market Upside Down

Tuesday, 05 Nov 2013 12:08 PM

By John Morgan

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The Federal Reserve has turned the stock market upside down, making bad economic news a reason to buy stocks, and good economic news a reason to sell them, according to Forbes contributor Jeffrey Dorfman.

The distortion keeps the real value of assets obscure and stuck in an Alice in Wonderland maze, he claims.

“The answer to this bizarre market behavior is simple: the stock market is being ruled by the Fed, not by fundamentals,” Dorfman, an economics professor at the University of Georgia, wrote in a Forbes column.

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“Good news is bad for the market because it makes people worry that (quantitative easing) may come to an end. In simple terms, what matters to the stock market is the easy money from the Fed, not the performance of the companies whose stocks they are buying and selling.”

Cheap money from the Fed benefits hedge funds, institutional investors and money center banks because they can borrow huge sums at low interest rates and invest it in stocks.

But the Fed stance also means millions of individual Americans have been forced out of low-yielding fixed income investments and into stocks whether they like it or not.

“The manner in which the stock market indices slide on any hint that the Fed’s easy money policies may be approaching an end show that the Fed is artificially inflating the stock market,” Dorfman said.

“Clearly, the stock market’s boost from the Fed is not permanent as the market has made clear it will drop as soon as the Fed turns off the pump.”

The Fed should be pushing policies that create actual economic growth via increased production and job gains, not goosing stock prices, according to Dorfman.

One influential member of the Federal Open Market Committee, St. Louis Fed President James Bullard, told CNBC he believes the central bank should not be so quick to withdraw stimulus so long as inflation is low.

Bullard voted at last week’s FOMC meeting to maintain the Fed’s current monthly $85 billion in asset purchases.

Outspoken Dallas Fed President Richard Fisher said irresponsible federal government behavior – he apparently was referring to budget battles played out between Congress and the White House — has thwarted the U.S. economic recovery.

"Unlike in most recoveries, government has played a countercyclical, suppressive role. The inability of our government to get its act together has countered the pro-cyclical policy of the Federal Reserve," Fisher said in remarks reported by Reuters.

Editor’s Note: 75% of Seniors Make This $152,000 Social Security Mistake (See Easy Fix)

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