Since the Fed began its campaign to tighten policy, Jerome Powell has happily ignored rising asset prices, a form of inflation.
As the Fed chair prepares to testify before Congress on Capitol Hill, Wall Street is beginning to wonder how long Powell's hands-off approach will last amid market frenzy.
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While tech stocks have been relentlessly breaking records of late, Goldman Sachs Group Inc.'s financial health metrics have deteriorated at the fastest rate in 40 years. The ever-volatile Bitcoin reached new heights at one point Tuesday as the memecoin crowd took a breather. Regarding economic growth, even Dr. Nouriel said, “Doom.'' Roubini's statement is, well, bullish.
As such, market participants said the rise in assets is making life difficult for the Fed's governor, who has a history-defining mandate to ease monetary policy in the coming months without compromising the progress of inflation. Be on the lookout for signs.
“The Fed needs to closely monitor financial conditions, and this is a sensitive situation for Chairman Powell,” said Priya Misra, portfolio manager at JPMorgan Asset Management. She said, “If markets expect the Fed to cut rates aggressively, too much easing will cause a rebound because the Fed wants to make sure it keeps inflation under control.”
With more than $8 trillion added to the S&P 500 index since the end of October, Powell has remained silent, creating an uneasy truce between the Fed chair and the market. Everything is thought to have worked in the central bank's favor, preserving the wealth of wealthy consumers and cushioning the impact of 11 interest rate hikes on mortgages and other debt service obligations.
“Equities are at record highs and credit spreads remain strong, not to mention the fact that we had record investment-grade debt issuance at the start of the year,” said Adam Phillips, managing director of portfolio strategy at EP Wealth Advisors. It's tough,” he said. “These conditions suggest that monetary conditions remain accommodative enough to buy the Fed some time as policymakers consider eventual easing.”
Add in the fact that inflation-adjusted interest rates have risen to high levels just as bank lending standards have tightened, and market conditions are actually consistent with the Fed's goal of easing excess interest rates. It can be argued that there is, as Chairman Powell has long argued. business cycle.
But some on Wall Street are concerned that they see signs of trouble ahead. Bloomberg measures of U.S. financial conditions have already returned to the accommodative levels seen before the Fed began raising interest rates. Similar metrics at Goldman show that the cumulative relaxation across assets over the past four months is one of the largest since at least 1982, according to Bespoke Investment Group LLC.
Against this backdrop, Atlanta Fed President Rafael Bostic warned this week that “pent-up enthusiasm” as businesses ramp up spending and investment is complicating the outlook for future monetary easing.
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“As we see the stock market continue to rise and approach valuations last seen in late 2021, we think there is less reason for the Fed to ease,” said Michael Bailey, director of research at FBB Capital Partners. Deaf,” he said. “The Fed is evaluating these easing factors in the context of tightening in other parts of the economy.”
At a January meeting that preceded the market's recent rally, Fed officials cited a scenario in which accommodative financial conditions would help the inflation outlook, but warned that it would be better to cut rates sooner rather than later for too long. They remained concerned about the risk of cutting interest rates too much. Still, policymakers were generally optimistic, pointing to large-cap tech companies as the direct cause of gains in broad stock indexes, while their overall market assessment was “more subdued.”
Of course, how central banks frame the proliferation of risk assets against their monetary policy goals may not matter all that much. The economy remains strong, corporate profits are on the rise, and the bull market that began when interest rates of all kinds were fairly high continues. Money has flowed into stocks and cryptocurrencies largely independent of central bank policy, and is being sucked in as the threat of recession wanes.
And many on Wall Street dismiss the argument that the Fed cares about market activity, so long as it doesn't fuel inflationary pressures. The historical evidence that rate cuts cause bubbles is significantly mixed. Some see the easy policy of the early 2000s as setting the stage for the financial crisis, but the dot-com bubble of the late 1990s coincided with a period when interest rates were higher than they are today.
“If financial conditions are plentiful and unemployment and inflation are low, the Fed will act in the way it thinks is best to maintain full employment and price stability,” said Jim Caron, co-chief investment officer at Morgan Stanley Investments. ” he said. management. “Asset prices reflect feedback on policy decisions. But they do not govern them.”
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