(Bloomberg) – Don’t rely on Federal Reserve Chair Jerome Powell to rescue stock market losses – at least not yet.
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Ether George, president of the Kansas City Fed, said Thursday that market declines are not surprising given the central bank’s repeated warnings that it will continue to raise interest rates to cool the warmest inflation in decades. He acknowledged that a “rough” week in equities was underway, but his comments in a CNBC interview on Tuesday did little to soften the tone set by Powell, who warned that officials wanted “clear and credible” evidence that price pressures were reversing.
This is not encouraging for investors to bet on the upcoming practice of a “Fed Put” – where the central bank changes policy to support the equity market after a sharp fall.
The Fed raised interest rates by 50 basis points earlier this month, and Powell indicated that it would take similar measures at its meetings in June and July, as well as reduce the central bank’s inflated balance sheet. But in the months ahead, signs of a slowdown in the economy and declining price pressures will set the stage for a debate on the return to quarter-point growth at the September 20-21 meeting of the Federal Open Market Committee.
Priya Mishra, head of global rate strategies at TD Securities, said, “The tightening of financial conditions is a deliberate consequence of Fed growth and QT, or quantitative tightening.” “They want to reduce the overall demand and to do that they need to tighten the financial situation.”
The S&P 500 hit its worst sell-off on Wednesday since June 2020 as investors assessed the impact of higher prices on earnings, frustration at retailers Walmart Inc. and Target Corporation, as well as tightening monetary policy for economic growth. This week’s slide extends the year-to-date decline by about 18%. The tech-heavy Nasdaq index is down 27%.
Although his remarks preceded the last slide, Powell was not bothered by the weakness he had seen since January.
“Of course there are some volatile days in the market,” Powell said at a Wall Street Journal-hosted event on Tuesday, explaining that satisfied markets have set the price for future Fed growth. “Financial markets have been able to respond well in advance, based on the way we talk about the economy and the consequences. Overall, the financial situation has improved significantly. I think you see that. That’s what we need. “
What Bloomberg Economics says …
“I think the Fed welcomes that. The stock market needs to cut a lot more before it can get close to wiping out stock profits during an epidemic – double the current drop – it sounds difficult, but the declining stock will allow more people to retire early. “
– Anna Wang, chief US economist
Falling equities help slow the Fed’s goal of growth due to the “asset effect” where investors cut some spending in response to a market downturn. JPMorgan Chase & Co. Economists have downgraded their U.S. economic forecasts for this year and beyond, citing stock declines in part. Translating the lost financial assets as a চের 1 cost drop of two to three cents a year, they estimate.
Nomura Securities economist Robert Dent said: “What we have seen so far is consistent with the Fed’s objective of strengthening the financial position to slow growth. “The market has begun to come to an agreement with the Fed, which is determined to bring down inflation.”
Stocking the stock market is not the only goal of tightening the Fed. High rates for home mortgages and vehicles reduce demand in markets where supply was low, and a stronger dollar has the effect of reducing export demand for U.S. manufacturers and lowering import prices.
Nonetheless, there are limitations to how far stocks can go before the Fed pays attention. Although much of this year’s fall has been a revaluation of equities and future earnings based on expected higher interest rates, a decline that seems to be a sign of a more severe recession in the economy than expected.
Roberto Pearly, head of global policy research at Piper Sandler, said: “The Fed may welcome the tightening of the financial situation, but they are walking a very fine line.” “If the S&P 500 earnings estimates start to decline overall, the Fed will probably pay attention. It will be a sign that the economy is collapsing and a soft landing is less visible. “
Fed leaders have learned from the recession of the past two decades that the fall in equities is usually not very productive, while any setbacks in the credit market – such as the subprime mortgage blowup that led to the 2007-2009 recession – could be extremely damaging to the 2000 technology-stock plan. When the dot-com bubble burst, most central bankers saw it as a boon to the economy.
“The key thing for the Fed is is to seize the credit market,” said Diane Swank, chief economist at Grant Thornton. “It’s not easy to recover from this and it’s something to protect. It’s much easier to recover from a Fed-induced recession.”
John Williams, president of the New York Fed, said this week that he supports Powell’s plan to raise rates.
Most Fed officials have embraced raising rates in a neutral setting – which does not accelerate and does not slow the economy – this year. The FOMC estimates that the quarterly forecast updated in March was 2.4%. Powell and other Fed officials said they were willing to go beyond that level if needed to reduce prices, although growth could slow.
Chicago Fed President Charles Evans outlined a plan in a Bloomberg News interview this week where policymakers would quickly neutralize the rate, then switch to a “more measured pace” of quarter-point growth to end above 50 or 75 basis points. Neutral
Though the near-term policy outlook remains unchanged, any indication of market volatility and slower growth could pave the way for a policy shift from “peak Fed Hawkiness,” said Thomas Costarg, a senior U.S. economist at Pickett Wealth Management.
“My view is that the Fed will pivot over the summer,” he said, adding that the decline in stocks indicates a slowdown in growth. “The Fed’s deep DNA of growth and market conservation will be revived.”
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