Market participants and the Fed’s policymakers view the situation in the US stock market from different angles. Whereas investors are spooked by the ongoing deep correction, the Federal Reserve does not consider this an argument to revise the unveiled course of aggressive monetary tightening.
The US equity market developed a stunning rally throughout 2021 and closed the year at multi-year peaks. In early 2022, the quotes of major stock indices reversed downwards. The downtrend scared away investors but did not shake the hawkish rhetoric of the US central bank. It sent a clear message about the imminent cycle of rate hikes and announced a faster tapering of the asset purchase program from January 2022. The US regulator has toughened its rhetoric because raging inflation amid market jitters required drastic counter-measures.
“By any measure as the Fed looks to assess capital markets stress … we are nowhere near the same point as in 2018 where the central bank reconsidered its monetary policy stance,” DataTrek co-founder Nick Colas commented on the Fed’s expected policy moves. “Put another way: until we get a further selloff in risk assets, the Fed will simply not be convinced that raising interest rates and reducing the size of its balance sheet in 2022 will more likely cause a recession rather than a soft landing,” he added. During the coronavirus crisis, the stock market could rely on the Fed’s stimulus measures that provided enough liquidity. Once the domestic economy is back on track, the central bank is withdrawing its massive stimulus.
“That gets into the circular nature of monetary policy. It gooses asset prices when they are pedal to the metal, and asset prices fall when they back off. The difference this time is they have rates at zero and inflation is at 7%. So they have no choice but to react. Right now, they are not going to roll over for markets just yet,” Peter Boockvar, chief investment officer at the Bleakley Advisory Group, stated his viewpoint.
