Chris Ciovacco: Using simple principles of human nature, we can conclude the Fed, and central banks around the world, will continue to print money longer than most market participants believe. Therefore, a bullish tailwind may remain behind stock prices longer than most market participants believe.
Why Do They Keep Printing?
The following valid question is often asked by U.S. investors and taxpayers:
If quantitative easing (QE) has not significantly impacted job creation or economic growth, why does the Fed keep printing money and buying bonds?
Before we answer that question, it is important to note there is very little difference between QE and normal open market operations used by the Fed to adjust interest rates in all economic climates. The difference is QE occurs when interest rates are already hovering near zero. Therefore, if QE “does not work” then questions may arise about why we need central banks at all.
Ego And Self Preservation Are Powerful Forces
Let’s assume the Fed came out and said:
After a thorough analysis, we have concluded QE has not positively impacted the economy or job creation. Therefore, we will begin phasing out QE by reducing our bond purchases each month.
If they admit QE did not work and say it will not be used in the future, the governors will have effectively given the Fed a very significant demotion on the global power org chart. They would also be admitting that all of their white papers about the importance of monetary policy drew inaccurate conclusions. In short, central bankers would have to admit (a) they were wrong, and (b) it is now unclear that central banks can materially impact the economy or business cycle.
We Are All Human
How many people do you know in your personal or professional life that will not go down swinging before they (a) take a significant power-reducing demotion and (b) admit they were wrong? We are all human. We all want to be relevant and right. We all innately protect our power base. Nobody wants to be wrong or less relevant.