Source: Zhitong Finance
Author: Wei Haoming
U.S. stocks are plunging, but don’t expect Fed Chairman Jerome Powell to come to the rescue of shaky stocks — at least not yet. Kansas Fed President Esther George said on Thursday that the market slump was not surprising given the Fed’s repeated warnings that it will keep raising interest rates to cool the highest inflation in decades.
While George acknowledged that the stock market had had a “difficult” week, her remarks in the interview did little to soften the tone Powell set on Tuesday. Powell has warned that officials seek “clear and convincing” evidence that price pressures are receding.
The Fed is reluctant to bail out the market
For investors betting on the imminent implementation of the “Fed Put”, the situation is not encouraging. The so-called “Fed put” is the belief that the Fed will pause or delay policy tightening to save the stock market in the event of a slump, while the “Fed call” is the opposite.
Zhitong Finance has reported that the Fed only decided to raise interest rates by 50 basis points for the first time in 22 years earlier this month. Powell later said at a press conference after the meeting that the next two meetings in June and July may be suitable for raising interest rates by 50 basis points, and Start shrinking your balance sheet.
Priya Misra, head of global rates strategy at TD Securities, said: “The tightening of financial conditions is the inevitable result of the Fed raising rates and quantitative tightening. They want to reduce aggregate demand, and to do that, financial conditions need to tighten.”
The S&P 500 suffered its worst sell-off since June 2020 on Wednesday, as investors assessed price gains after disappointing results from retail giants Walmart (WMT.US) and Target (TGT.US). The impact of U.S. stock market earnings and the threat to economic growth from tighter monetary policy. This week’s losses extended year-to-date losses to about 18%. The tech-heavy Nasdaq fell 27%. Powell did not sound disturbed by the stock market weakness since January.
“There are clearly some volatile days for the market,” Powell said on Tuesday, explaining that he’s glad the market has priced in future Fed rate hikes. “It’s great to see financial markets react ahead of time based on how we talk about the economy and its consequences,” he noted. “Financial conditions have tightened significantly overall. I think you’ve seen it. That’s what we need.”
“I think the Fed welcomes this,” said Anna Wong, chief U.S. economist at Bloomberg Economics. “Stocks still need to fall significantly — twice as much as they are now — to come close to erasing the gains made during the pandemic.”
Guggenheim Partners global chief investment officer Scott Minerd warned that the Fed’s tightening of monetary policy is “too much”, the US stock market may experience a “painful summer” in 2022, and the Nasdaq may fall by 75% from its peak (it is only now relatively The all-time high recorded on November 19, 2021 is about a 28% correction), and the S&P may fall 45% from the top (it is currently only down 18% from the all-time high recorded on January 3, 2022). That could be very similar to what happened in 1999 and early 2000 when the dot-com bubble collapsed, Minerd thinks.
Fed targets: Cooling economy, lower inflation
A drop in the stock market helps the Fed achieve its goal of slowing economic growth, as financial assets make up the majority of U.S. household assets, and as such, the “wealth effect” helps reduce demand, in which investors cut some spending in response to market declines. JPMorgan economists cut their U.S. economic forecasts for this year and next, in part because of the stock market decline. They estimate that for investors, every dollar of financial wealth lost reduces spending by 2 to 3 cents over the course of a year.
Robert Dent, an analyst at Nomura Securities, said: “What we are seeing right now is consistent with the Fed’s goal of tightening financial conditions to slow economic growth and adjusting demand in the face of sluggish supply. The market is starting to accept that the Fed is determined to do whatever it takes. A lower inflation stance.”
The stock market is not the only target of Fed tightening. Rising interest rates on home mortgages and car purchases have also reduced demand in these markets, which have been in short supply, fueling inflation, while a stronger dollar has reduced demand for U.S. manufacturers’ exports , and depressed import prices.
Even so, there are limits to how far stocks can fall until the Fed cares about them. While this year’s decline has largely been due to a revaluation of stocks and future earnings on the basis of expected rate hikes, the decline appears to herald a deeper-than-expected economic downturn, which would be worrying.
“The Fed is likely to welcome tightening financial conditions, but they are very cautious,” said Roberto Perli, director of global policy research at Piper Sandler. “If S&P 500 earnings expectations start to decline overall, the Fed is likely to pay attention. This will be a Signs that the economy is faltering and a soft landing seems less likely.”
The Fed chair has learned a lesson from the recessions of the past 20 years: Stock market declines usually don’t have much impact, and any disruption in credit markets—such as the subprime mortgage crisis that led to the 2007-2009 financial crisis—could be extremely damaging. of destruction. When the dot-com bubble burst in 2000, tech stocks tumbled, and Fed officials see it as largely good for the economy.
Diane Swonk, chief economist at Grant Thornton, said: “What matters to the Fed is the freeze in the credit markets. It’s not easy to recover, it’s something to guard against. A Fed-induced slowdown is easier to recover. “
New York Fed President Williams said this week that market volatility is just digesting information; adding that he supports Powell’s plan to raise interest rates.
Most Fed officials are in favor of raising interest rates to a neutral level this year — neither accelerating nor slowing economic growth. In its quarterly forecast updated in March, the Federal Open Market Committee (FOMC) estimated a neutral rate of 2.4%, with the current federal funds rate in the range of 0.75%-1%. Powell and other Fed officials have said they are willing to go well above that level if necessary to cool prices, though the pace of rate hikes could be slowed.
Chicago Fed President Evans laid out a plan in an interview this week in which policymakers would quickly raise rates to neutral before moving to a “more cautious pace” — raising rates by 25 basis points and eventually raising them to 50 or 75 basis points above neutral.
Still, while the near-term policy outlook remains unchanged, market turmoil and any signs of slowing economic growth could set the stage for a policy shift at the “peak of the Fed’s hawkish stance,” said Thomas Costerg, senior U.S. economist at Pictet Wealth Management.
“My view is, and still is, that the Fed’s policy stance will shift over the summer,” Costerg said. “A drop in the stock market predicts a sharp decline in growth. The Fed’s deep DNA to protect growth and markets will resurface.”
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