The stock market rally is being inflated by easy Federal Reserve money

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The stock market rally is being inflated by easy Federal Reserve money

Tuesday, August 11th, 2009 | Economics |

Any number of blogs I read have been saying that the recent stock market rally is based on nothing but loose money provided by the Federal Reserve to banks and other financial institutions. The stock market P/E ratios are crazy and the price increases are accompanied by tiny volumes. No one in their right mind would buy into this market unless they had lots of money lying around and nothing to do with it.

I’m amazed to see that even Reuters and CNN realize this is a rally built on cheap money provided by the Fed, just as the housing bubble was built on cheap money provided by the Fed.

CNN - Stocks: The latest Fed bubble:

Though liquidity is admittedly a nebulous concept, there’s no question that central bankers around the globe have poured huge amounts of money into the markets to ease the financial crisis. Given free money, investors’ appetite for risk shoots higher and they gobble up stocks.

But surely all the free, cheap money (”quantitative easing” is the central banks’ preferred term) won’t cause inflation, right?

Fed officials have stressed that they will start to unwind their financial support programs at the earliest sign of inflation. Given the cost of cleaning up after the last bubble, Becker writes that “this time, policymakers are unlikely to remain inactive should they suspect the formation of another asset price bubble.”

But it’s clear that bankers are loath to pull back on their support for the financial system before it’s clear the economy has staged a stronger recovery. And the Fed has a long and painful history of ignoring asset price inflation.

“The central bankers have this textbook belief that the only inflation is the kind that appears in consumer price indexes,” said Simons. “They don’t believe what they’re doing could cause an asset price bubble.”

But comparing the bankers with a driver pulled over for speeding for the umpteenth time, Simons said, “At some point, you have to say maybe your speedometer’s broken.”

Yep. See here:

Tags: inflation, investing, the fed