The Investment Scientist

What Fed’s $1.5T Money Injection Means For the Market

Posted on: March 13, 2020

unnamed (11).jpgYesterday, what got lost in the panic selling was the Federal Reserve’s announcement that $1.5T will be injected into the banking system. 

Nowadays, money is created not through Treasury’s printing press, but through the Fed’s central bank balance sheet expansion. I won’t bore you with the mechanism. Suffice to say that yesterday, $1.5T of new money was created, and this new money has to go somewhere.

There are only three buckets into which this money “water” can go: 1) goods, 2) services and 3) assets. Do you think that over the next few months, we the people will consume more goods and services? Apparently not since we will all be hunkering down in our basements. The only place the new money can go is to purchase assets, meaning stocks, bonds, and real estate.

The public health situation may get worse, possibly much worse, but the Fed has already primed the market for a comeback at some point.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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