In the Fed We Trust

E Pluribus Unum (out of many,one) has been the unofficial US motto since the birth of our country in 1776. This 13 letter phrase cleverly symbolized the core formation of our country from the original 13 colonies. In 1956 the US enshrined “In God WE Trust” on all currency as our official motto. While both phrases on our coins and bills are symbolic of our country’s founding, perhaps we should add a third motto, “In the Fed We Trust”, given the Fed’s forceful precision in dousing raging panics and creating equity Bull markets. In 2009 and 2020, a Federal Reserve Bank action on a single day halted the worst economic and market panics since the 1930’s Great Depression. In September 2008 the Fed stepped into the limelight creating Japanese style Quantitative Easing (QE), essentially borrowing money from itself to unfreeze risk averse bank liquidity. The real magic trick came with the start of the Term Asset-Backed Securities Loan Facility (TALF) on March 10th. Through TALF the Fed funded AAA-rated debt for mortgages, auto loans, credit card loans, student loans, and small business loans. We can see here how risky AAA bond spreads had become surging beyond 1%. When the Fed stepped in to unfreeze AAA securities on March 10th 2008, panicked stock investors reversed course, marking the start of the greatest Bull market in history. Eleven years later the Government reaction to the Covid-19 pandemic created the quickest equity Bear market in history with a Depression’esque economic shock. The global financial system was within weeks of an out of control collapse without Central bank use of its QE, TALF and other acronym crazy super powers. It doesn’t garner the attention it deserves, but on March 23rd this year the Fed backstopped our above Junk grade debt markets, collapsing yields and turning a stock market rout into a relentless rally from that day forward. Don’t fight the Fed is an adage that once again has validated its mettle.

As of May 27th the AAA bond spread is a healthy 0.86% and the Fed has pumped in $3 Trillion in three months to buy beleaguered debt securities. They haven’t yet resorted to using their imaginary piggy bank to buy stocks, as Japan has done, but investors should find solace in the Fed’s vow to use unlimited money creation to provide infinite liquidity as required by our financial system. They are not as omnipotent as a deity should another Black Swan type event more permanently shut down the economy, but it’s usually a good bet to stay invested with the Fed. If the Fed can’t stop the next free fall, prayer may become your backup plan.


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