The Fed (or Treasury) could even go as far as directly intervening in the stock market via direct purchases of equities as a way to boost falling equity prices. Given the build up we have had over the last few years to the momentous decision to change interest rate policy, think of how much our perceptions of Fed power will change, if stock and bond markets respond with yawns to an interest rate policy shift. The fed is buying to hold, and will turn around next day or hour or second or millisecond or picosecond, to put the bond on the market again.
Investors have abdicated their responsibilities for assessing growth, cash flows and value, and taken to watching the Fed and wondering what it is going to do next, as if that were the primary driver of stock prices. Market watchers, journalists and economists have found stories about the Fed to be great fillers that they can use to fill financial TV shows, newspaper and opinion columns.
The Fed has happily accepted the role of market puppet master, with Federal Bank governors seeking celebrity status, and piping up about inflation, the level of stock prices and interest rate policy. If we imagine a risk-free world where all options are exercised, and firms sterilize financial cash flows by buying shares when they issue stock options, we would see that this would cause gross cash distributions to rise, even though there would be no net effect on firm capitalization.
I wonder…stock options are basically the pairing of two transactions: 1) a subsidy to workers based on changes in the share price, which are an expense, and (2) an arbitrary stock transaction that happens as part of the compensation, which creates an accounting shadow of financial cash inflows and outflows. Actually if you graph the effective fed-funds rate on FRED you can see the effective rate, the average obtained from loans reported by Fed-Funds brokers, varying day-to-day.
I have seen nobody ever comparing the size of US Treasury bond with the QE. Basically, if the US Treasury Bond market is equivalent to the US Budget then we can say that the Fed is financing 0.04% of the US budget every year. So the correct comparison should be QE volume relative to total US govt debt outstanding and/or QE volume compared to new govt bonds issues in the same time period. Moreover, several officials have suggested the government should support stock prices.