Fed's action could drive financial market discussion in 2026
It was early summer 2020. I would be turning 50 later in July. My brother and business partner Mario suggested I try out his mountain bike on the trails behind my house. He thought I might like it and maybe get one for my birthday.
"We tried that sport back in the '90s -- those bikes almost killed both of us. Why would I want to go back to that insanity?" was my response. "The equipment has come a super long way. These modern bikes are full of amazing technology and are nothing like those crazy bikes we used to ride. Just give it a try," was his response.
I tried the bike. Three weeks later I owned my own. Now, five years later, I've traveled the country with my mountain biking buddies, riding trail systems and lines of descent I would have never thought doable just a few years ago. Am I a great mountain biker? Absolutely not. I intend to spend the next couple decades becoming better -- advancement is in our nature as human beings, and I plan on advancing my mountain biking.
Collectively, we human beings tend to take the extreme and make it mundane over time. The first satellite launch changed the world; now we launch 300 a year. The same applies to economics and markets, and an important example of this trend may be occurring as we speak.
By now, most Americans understand the Federal Reserve Bank (the U.S. Central Bank) is able to create new money -- yes, out of thin air. This new money can be supply-and-demand driven, as a response to bank lending and consumer spending, and it can be policy driven in response to economic and market conditions as determined by Fed policy makers.
This policy-driven new money creation is called Quantitative Easing (QE) -- a complicated term used to describe a straightforward concept. When the Fed does quantitative easing, it creates new money and then injects the money into the economy by way of the bond market. It does this by using newly created money to buy certain types of bonds, and when the Fed is conducting or planning to conduct this type of activity, it announces it through policy statements and press briefings.
Last week the Fed announced the restarting of quantitative easing, only this time the central bank called it "Reserve Management Purchases" -- probably because they love using Fed-speak to appear transparent while sounding opaque, but we are on to them at this point.
Make no mistake: Reserve Management Purchases is quantitative easing, and the Fed plans to expand the money supply by $40 billion a month and use this new money to purchase U.S. Treasury bills and notes, essentially printing new money to loan it to the Federal government. For column purposes, let's assume the primary focus of this policy is to support liquidity in the short-term U.S. Treasury bill market, which has to be refinanced in 2026 to the tune of $9 trillion.
Previous bouts of quantitative easing policy in 2008 to 2014 and 2020 to 2022 were generally supportive of "risk assets" -- a fancy way to say stock prices. During those QE periods the S&P 500 Index rose significantly. Now there were plenty of extraneous factors during both prior periods and I use these observations only to make a point: expanding the money supply tends to correspond with rising asset prices.
Which brings us back to the mountain biking. Five years ago I had no interest in this crazy sport; now I perch at the edge of Black Diamond descents not thinking "if," but only "which line" to take. Is it not reasonable to think markets may react similarly to this next quantitative easing period? Like adrenaline junkies of any stripe, having been to the QE trails before, investors just may not be that impressed with this next round.
Unfortunately, rising asset prices aren't the only trends which tend to correspond with expanding the money supply. Consumer price inflation has also been a by-product, and I can envision a scenario where indifferent investors leads to stagnation on Wall Street while at the same time inflation in the U.S. reaccelerates, causing pain on Main Street -- a double whammy.
I expect this trend to drive much of the financial market discussion going into 2026. Previous QE journeys aside, I'm just not sure where this new trail will take us.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
