Market reaction to fed : Why the Fed may not bail out the stock market this time

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The Federal Reserve held its last policy meeting six days ago. But it feels like it’s been 60 days, given the unnerving shift in markets that’s taken place in the three trading sessions since then — a 7.2% drop in the S&P 500 that has left the index 17% below its early January high.

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  • It’s the kind of moment when you might expect heightened chatter about the Fed relenting on its interest rate hike plans. But right now, all signs point to the Fed being less reactive to markets than it was in the not-too-distant past.

Why it matters: Investors can’t count on the “Fed put” in the potential bear market of 2022.

  • The Fed put is a term used to describe the central bank’s recent tendency to pivot toward looser money whenever markets drop, acting like an options contract that protects against losses.

Flashback: In late 2015 and again in late 2018, the Fed sent signals that sustained monetary tightening was on the way, then backed off in the ensuing weeks when financial markets started to go haywire, contributing to the idea that the central bank stood ready to bail out investors.

Yes, but: Things look awfully different in 2022. The biggest difference is that those previous tightening actions were pre-emptive — aimed at preventing inflation from taking off. This time, inflation is a major problem in the here-and-now, not a distant potential threat.

  • Moreover, in those episodes, longer-term bond yields fell. Financial markets were essentially signaling the Fed was making a mistake, risking a recession that would force policy makers to reverse course and end up with lower rates for longer. In this episode, bond yields have been rising and the yield curve steepening.
  • In this selloff, the sectors with the sharpest declines are also the frothiest segments of the economy, like unprofitable tech companies and crypto assets.
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And for all the discussion of recession risk, Fed officials emphasize signs of economic robustness, like a very strong labor market and strong household and corporate balance sheets, that may cushion the blow of higher rates.

  • “If you think you’re already close to the edge of a recession, you might be more worried about the things that could push you over the edge,” Vincent Reinhart, chief economist for BNY Mellon Asset Management, tells Axios.

Last week, chair Jerome Powell pretty explicitly signaled that the Fed will raise interest rates by half a percentage point at its next two meetings. After that, policy will get more interesting as Fed officials figure out how high they think rates need to go to choke off inflation.

What they’re saying: “The stock market is volatile,” Raphael Bostic, president of the Atlanta Fed, tells Axios. “It goes up and it goes down. I think part of what we’ve seen there is a byproduct of a wide range of narratives about the prospects for the economy.”

  • “When you have a wide range of views, you’re going to get more volatility in those markets. That’s what we have. To be frank, I don’t think that’s super surprising. There’s a ton of uncertainty in the world today.”

What might change things and cause Bostic to re-evaluate his support for rate hikes in the near term? “It would have to be some significant negative shock that would have to occur,” he says.

The bottom line: Never say never. But the conditions that made the Fed quick to reverse course in previous episodes of market volatility don’t really apply now, which means relief from volatile markets may be hard to come by. [source]

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