In fact, the latest Federal Reserve action has continued a trend of pampering equity investors. Of late, actions by the central bank have shown that it is committed to a friendly environment for participants in the market.
The most prominent of these supportive measures is the continued practice of interest rate manipulation in order to enable economic stability. The recent announcements by the Fed have maintained interest rates at their current levels, which was widely expected by the market. This decision therefore alleviates many investors who have been operating under extremely volatile conditions.
Besides that, the Fed has pursued active quantitative easing with its buying of assets. This activity has stabilized markets and allowed investors to be confident in their equity holdings, as such actions insure liquidity. In conjunction, the Fed has taken to inflating its balance sheet by pumping fresh capital into the financial system, a process which indirectly shores up stock markets.
They are not just sitting and reaping policies; the equity investors are very much into it. Data available indicate that there is an extraordinary increase in the level of stock buybacks, surging over the last few months. At the same time as boosting shareholder value, companies use low-interest environments to buy back their shares.
This ecosystem of support is further magnified by the communication strategy of the Fed. Clearly and coherently communicated messaging by central bank officials has taken away some of the uncertainties that usually unnerve the markets. In fact, the Fed has anchored expectations by painting a clear picture of their policies and outlooks well in advance, thereby adding another layer of security to the equity investors.
These accommodative monetary policies also show the strong performance of equity markets, which can be linked to investor sentiment buoyed by such policies. In the current case, when interest rates are kept at historic lows, alternative investment avenues like bonds generate returns that are extremely low and would, therefore, divert more capital into stocks. Higher demand for equities pushes prices upward, further enticing investors in a positive feedback loop.
Meanwhile, though there is little doubt that Federal Reserve policies have been a tailwind to the stock market, one needs to consider the ramifications on the greater economy. Critics will argue that a too-inflated stock market will result in economic imbalances sooner or later. For now, equity investors would seem to be enjoying the ride and are reassured by the Fed's ongoing support in the form of monetary policy.
Going forward, the Fed's game plan will set the course of market dynamics, for sure. How well the central bank manages this tightrope between economic growth and the formation of asset price bubbles is anybody's guess. But rest assured, equity investors can sleep well tonight, knowing the Fed has got their backs.
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Author: Rachel Greene
