Bennington: The Fed is the Dominant Agent in This Market

Your Real Vision Daily Briefing for July 29, 2020

Ed Harrison and Ash Bennington come together to discuss the Fed in light of the FOMC’s announcement today.

  • Investors’ feelings regarding Fed action can interfere with one’s ability to make money.
  • Because of the Fed’s mandate, they are essentially “the only game in town,” which has led to unprecedented force in responding to the crisis.
  • Some say the dollar could lose reserve currency status due to fiscal irresponsibility.

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If you want to make money in the markets, you need to be able to suspend disbelief, Real Vision’s Ash Bennington and Ed Harrison said today during their Daily Briefing discussion.

Bennington and Harrison agreed that it’s a dangerous thing when investors let their personal views of what “should” be happening interfere with their analysis of markets. It’s the world as it is, not as you want it to be, they said, and investors should care only about the price associated with assets.

“We have to deal with what is and decide how it will effect economic outcomes. The outcomes are all that matters,” Harrison said.

Still, the pair admitted that it is difficult to ignore what the Fed is currently doing, especially in light of the FOMC’s announcement today.

Bennington drove home how the Fed, at this time, is the dominant agent in markets. They’ve been put in the position of being the lender and guarantor of last resort for the U.S. economy, making them the only game in town, and this position has led to an extreme response.

Today’s announcement confirms that this response will continue; the Fed does not believe the toolkit has been exhausted and they will continue to try to help.

Harrison and Bennington also discussed the arguments concerning the dollar losing reserve currency status during the briefing, and Harrison said that he is not convinced that this will happen as a result of Fed policy.

He pointed out that as the monopoly supplier of reserves in the U.S., the Fed has more control over interest rates than people think. He believes the bond vigilantes are a myth and that they really act via the currency route.  

Harrison doesn’t see the dollar losing reserve status when currency goes down; he just sees people choosing their vigilantism via currency instead of rates, which tells us that people believe the Fed will continue to keep rates low so they’re selling the dollar, he said.