For most of the stock market’s history, this was how it worked. But that all changed in 2008, sadly, in the wake of the financial crisis, when former Fed Chairman Ben Bernanke saved the banks with quantitative easing (QE), flooding the American economy with oodles of cash.
After nearly a decade of QE, the stock market grew fat on rock-bottom interest rates, and only a few years later that trend turned into an addiction. Equities became dependent on those low rates that investors were so used to, and any interest rate deviation from the norm had profound effects on the market.
In order to safeguard the American economy against financial ruin, the Fed needs to eventually unload assets from its balance sheet, so that if need be it can take emergency action once again.
But by reducing its balance sheet, the Fed will consequentially raise rates. When Powell announced his rate hike schedule back in October of 2018, the market plunged rapidly as a result.
