How Cash Injections into the Stock Market Affect You?
Even if you don’t invest in the stock market, it still affects you, especially during times like the kind we’re experiencing right now. In short, the stock market is one of the many economic indicators of just how well the US economy is doing.
Markets can help fund growth as well as prevent inflation, but just what happens when the government injects billions of dollars into it? The short answer is that it definitely affects you. But, the longer answer is just how much it affects you and what the long-term effects it has on the economy are.
We were experiencing a repo market before the coronavirus crisis occurred, meaning that the Fed was injecting billions of dollars into it well before people became worried about a 2020 recession. Here’s what you need to know.
When Did The Fed Start Injecting Cash Into the Market?
On September 16th, 2019, a technical glitch occurred, leaving the Fed and Wall Street feeling a bit uncertain about the future of the markets. This led to a repo market, which is when major financial firms trade trillions of dollars of debt for cash in order to keep the market going.
Bankrate explains it best by defining a repo market as “a two-way intersection, with cash on one side and Treasury securities on the other. They’re both trying to get to the other side. Essentially, it’s a short-term collateralized loan.” Sounds great, doesn’t it? In theory, yes. But, there’s more to it than just an interchange of cash and securities.
In January of this year, the Fed also announced that it would continue to participate in this kind of activity throughout at least April 2020 (keep in mind, this was before coronavirus caused a nationwide shutdown). But, they started injecting money into the market just a day after the glitch, on September 17th. It injected $53 billion in one day and said it would purchase up to $75 billion the next day.
Following growing economic concerns surrounding the coronavirus pandemic, the Federal Reserve announced on March 12th, 2020 that it would continue to launch a series of massive cash injections into funding markets that would total more than $1.5 trillion.
This makes sense, seeing as investors were getting weary surrounding major drops in the market. But, it ultimately had more to do with, as Victoria Guida of Politico noted, the fact that “interest rates on U.S. government debt recently plunged to record lows, as investors poured money into safe assets, but now trading in that market is not flowing smoothly.”
How Does This Affect Your Finances?
Let’s say you don’t invest a cent into the stock market. You’re probably thinking, “Well, how does this affect me?” For the average person, you might not feel the direct effects of this on your personal finances straight away. It’s got more to do with the overall compounding effect of everything that’s happening at the moment.
If it were any normal time (i.e. not during a pandemic and global economic crisis), you might find that you benefit from these kinds of cash injections. One chief financial analyst pointed out that it boosted the stock market so much that it was perhaps even beneficial to those with 401(k) investments.
However, things have changed significantly since January of this year when the Fed announced its plans to continue to inject cash into the markets. The March 12th announcement of cash injections of trillions of dollars changes the landscape a bit. This, along with the Trump administration’s stimulus package, means that you’ll likely notice an increase in taxes down the road.
Financial experts who spoke with Business Insider also noted that “the Fed's capital injections will only grow less effective as primary dealers prioritize their liquidity mandates over short-term lending markets, the analysts said.”
Managing Your Financial Health
The situation we’re in is a bit unique. Financial analysts and economists might normally be able to offer up advice regarding the potential side effects of cash injections into the stock market. However, these massive cash injections are currently combined with a major stock market coronavirus crash and the trillions of dollars the government will be spending to fund the 2020 stimulus package.
So, what should you do in the meantime while the government and its economy readjust to the new normal that we’re all living in? Manage your personal financial health as best as you can. Take a look at your budget, reduce your spending and figure out how to maximize and stretch your savings to carry you through the next three to six months if needed.
Another way to protect your financial health? Signing up for a debit card that’s optimized with your savings in mind. Our FDIC-insured 100% free Cheese Debit Card offers users lots of great opportunities for more savings by saving bonuses and cashback.
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