The Fed is not a friend of the stock market right now: Morning Brief

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Tuesday 20 September 2022

Today’s newsletter by Sam Roeauthor Follow him on Twitter at Tweet embed.

One of the Fed’s most telling comments about the markets came from Chairman Jerome Powell on June 15 when the central bank announced the largest rate hike since 1994:

“Over the course of this year, financial markets have responded and generally have shown that they understand the path we are setting.”

When Powell said that, the S&P 500 was already down more than 20% from its Jan. 4 high.

In other words, Powell emphasized that defeating the 2022 market was exactly what he and his colleagues wanted.

If that wasn’t clear enough, Minneapolis Fed President Neil Kashkari reiterated that sentiment on August 29 when he said he was “happy” to see the stock market plummet. It came after Powell reiterated his commitment to fighting inflation – even if it means “some pain for families and businesses”.

Photo: Courtesy of Sam Ro

Incidentally, this isn’t the first time Powell has used “pain” to describe what it would take to bring down inflation. At an event in the Wall Street Journal on May 17, he said, “There may be some pain in restoring price stability.”

To summarize, inflation has been consistently high. To control prices, the Fed believes that demand in the economy must calm. In order to cool demand, the Fed is pulling interest rate hikes to tighten financial conditions, making things more expensive to finance for businesses and consumers. Tighter financial terms include higher interest rates, a stronger dollar, and lower stock valuations.

This speaks to the conundrum in the markets: As long as inflation is uncomfortably high, the Fed will act in ways that are inconvenient for stock prices.

As we learned from the August CPI report, inflation remains uncomfortably high.

This prepares us for this week’s FOMC meeting which will take place on Tuesday and Wednesday. Unless the Fed unexpectedly announces a change in its approach to fighting inflation, expect an upbeat announcement.

Markets are likely to interpret Powell’s message on Wednesday as coming from pessimism, which happened after the July Federal Open Market Committee meeting. If so, don’t be surprised to see Fed officials come out and repeat that the Fed has a long way to go to achieve its long-term inflation target of 2%.

What are you watching today

Economic calendar

  • 8:30 a.m. ET: building permitsAugust (expected 1.610 million, 1.674 million over previous month, revised to 1.685 million)

  • 8:30 a.m. ET: building permitsMoM, August (expected -4.8%, -1.3% over previous month, revised to -0.6%)

  • 8:30 a.m. ET: Housing BeginningsAugust (expect 1.445 million, 1.446 over the previous month)

  • 8:30 a.m. ET: Housing BeginningsMoM, Aug (0.3% expected, -9.6% over the previous month)


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