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 60 days, given the troubling shift in markets that has occurred in the three trading sessions since then – a 7.2% drop in the S&P 500 that left the index 17% down. below its peak in early January.

  • This is the kind of time when we can expect more chatter about the Fed backing off from its interest rate hike plans. But right now, all signs point to the Fed being less responsive to the markets than it was in the not-too-distant past.

Why is this important: Investors cannot 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 move into looser money whenever markets fall, acting like an options contract that protects against losses.

Rollback: 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 weeks that followed when financial markets began to tumble. contributing to the idea that the central bank was ready to bail out investors.

Yes, but: Things look terribly different in 2022. The biggest difference is that these previous tightening measures were preemptive – 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, during these episodes, longer-term bond yields fell. Financial markets were essentially signaling that the Fed was making a mistake, risking a recession that would force policymakers to reverse course and end up with lower rates for longer. During this episode, bond yields rose and the yield curve steepened.
  • In this sell-off, the sectors with the steepest declines are also the foamiest segments of the economy, like unprofitable tech companies and crypto assets.

And for all In the discussion of recession risk, Fed officials point to signs of economic strength, such as a very strong labor market and strong household and corporate balance sheets, which could cushion the blow from higher rates.

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

Last week, Chairman Jerome Powell has signaled quite explicitly that the Fed will raise interest rates by half a percentage point at its next two meetings. After that, politics will become more interesting as Fed officials work out how far they think rates need to rise to stifle inflation.

What they say : “The stock market is volatile,” Atlanta Fed President Raphael Bostic told Axios. “It goes up and it goes down. I think some of what we saw there was a by-product of a wide range of narratives about the outlook for the economy.”

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

What could change things and cause Bostic to reassess its support for short-term rate hikes? “It would have to be a large negative shock that happens,” he says.

The bottom line: Never say never. But the conditions that allowed the Fed to quickly reverse course during previous bouts of market volatility don’t really apply now, meaning relief from volatile markets can be hard to come by.

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