Front-Running the Fed Pivot Might Not Work Next Time

May 08, 2023

by Charles Hugh Smith Of Two Minds

The Fed has trained the trading-rats all too well, and there is no way to avoid the unintended consequences of the Fed’s large-scale human behavioral experiment.

The Federal Reserve has been running a large-scale human behavioral experiment since 2008. The results are now in. Let’s start by stipulating that trading-bots are programmed to trade on human behavioral flows, i.e. trends and reactions to policy announcements and other “news” (earnings beats. etc.). As a result, the robot-trading-rats are responding to the same stimuli as the human-trading-rats in the Fed’s experiment.

Here’s the experiment set-up. When the trading rats hit the red button, the stock market swoons, and the Fed leaps into action to “save the market” by injecting trillions of dollars in stimulus and liquidity through various programs such as buying Treasury bonds. The trading-rats who “buy the dip” are rewarded with hefty gains as the market soars once the Fed “pivots” from “hawkish” to “dovish.”