Is the Federal Reserve, with its zero percent interest rates and promises of more quantitative easing (read printing more dollars) responsible for the markets rallying? It's hard to say for sure because much of the data doesn't really support the view that excess liquidity provided by the Federal Reserve has been finding its way into equity markets.
However, it could be that the possibility the Federal Reserve may provide additional levels of liquidity in the future that is driving equity prices higher.
We do have a bit of a paradox at the present time, however. If excess liquidity, or its future prospect, are driving stock prices higher, why is it that bond yields continue to move lower? To the extent that excess liquidity from the Federal Reserve may cause future inflation, bond yields should be rising, not falling. We tend to believe that institutional bond investors are the smartest players in the room, so we always pay attention to their actions.
So there is the paradox. Excess liquidity should create expectations of future inflation and cause bond yields to rise (prices drop), yet bond yields continue to move lower (prices rise). This is a paradox that is not easily resolved or explained. To find the answer, we may just have to wait until the Fed's next move.
