The recent decline in the S&P 500 has been a huge shock to financial markets. This would wipe out more than $10 trillion in wealth in the United States, putting our political system in jeopardy. But, the lack of a global crisis has not discouraged many investors from calling for further easing. Raymond Dalio, the founder of Bridgewater Associates, expects the Fed to go back to quantitative easing in the coming months.
After the surprise announcement, the Fed is already reversing course after lowering interest rates and lowering the reserve requirements that banks hold. The move ratcheted up support for a stuttering economy and a plunging stock market. European equities ended on a downbeat note, while the U.S. S&P 500 finished up 1.5 percent. It remains 7.9 percent below its end-2014 level. Further easing policy could not fix the cooling market, as investors are questioning whether a longer-term trend in the direction of more value is in order.
Ultimately, there is no single answer to the question of when the Fed will begin tapering its asset purchases. The central bank will have to make its decision based on economic data. If they don’t, the market will go to war. And if the economy deteriorates further, the Fed may have to buy equities outright. The Fed’s decision will be a political one.