The mechanics of a POMO market

Lately, it appears, it has gotten trendy to bash the New York Fed's Permanent Open Market Operations (POMO), especially by various self-appointed godfathers of the blogosphere. The logic goes, or so we interpret the thinking, that any given POMO is nothing but yet another component of the various signals that enter into the "perfectly efficient market" and the Fed's intervention is something that is perfectly acceptable, should be a tradeable event, and is nothing of real significance (and, of course, the original narrative would come wrapped in 10 paragraphs or so of fluff). Whatever. Below, in collaboration with John Lohman, we show what the market would look like without POMO, versus a market that is predicated exclusively on FRBNY interventions. The bottom line: starting with the first POMO in 2005, when the S&P was at 1,200 and continuing through today, the broader market index would have been at just over 800 if performance from POMO days was excluded. Alternatively, purely POMO days would have had the effect of doubling the stock market in the past 5 years. We hope readers can decide on their own whether Fed intervention in this case implies causation.