Market Crash Claim #3: The Fed Takes Away the Punch Bowl
The Federal Reserve has been trying to juice economic activity with quantitative easing for so long, it’s hard to image how the market could live without it. But now the Fed is gradually unwinding its program of buying up long-term debt and — sure enough — benchmark interest rates are rising.
The fear is that rising rates will reduce already weak demand, rip into corporate profit margins through higher borrowing costs and clobber emerging markets. It’s going to take some getting used to, but Fed tapering is unlikely to cause a market crash.
The central bank prepared the market for this eventuality, so investors were able to reset expectations. Furthermore, the Fed wouldn’t ease off the stimulus if the economy weren’t ready.
There will be volatility, but a crash? The Fed has lopped $20 billion off the program so far … and stocks are at all-time highs.