The Stock Market and the Federal Reserve

Wall Street Sign in New York with American Flags in the Background


Friday, August 26, 2022, Federal Reserve Chairman Jerome Powell spoke at the conference in Jackson Hole, Wyoming.

Since then, the markets have been falling.

Investors have focused almost all of their attention on the economy and the role that the Federal Reserve is now playing in the economy.

Mr Powell stated that the Fed should continue to raise interest rates and keep them at a higher level until policymakers are confident inflation is under control.

That is, the Fed must see inflation fall to around 2.00 percent, its policy target, and be confident that inflation will remain around this level.

Late Friday, investors indicated that they believed that the odds of the Fed giving us another 75 basis points in its key rate range were around 0.73.

The chance is significantly higher than a week ago.

Movement in the stock market

This is how the S&P 500 stock index performed.

S&P 500 since August 25

S&P 500 Stock Index – Since August 25 (Federal Reserve)

This decline in the index amounts to 6.5 percent.

This decline came when Chairman Powell spoke more forcefully than before that the Fed was determined to lower inflation and do whatever it took to drive down inflation rates.

It should be noted that the tightening round really started in mid-March, when the Fed took its first step this year to raise key rates. Shortly thereafter, the stock market began to fall.

S&P 500 since March

S&P 500 Stock Index – Early March (Federal Reserve)

The movement of stock prices has not been steadily going down.

As discussed in this post, investors do not have complete confidence in Mr. Powell and the Federal Reserve.

As a result, for the past four months, investors have debated whether or not the Fed will continue its fight to curb inflation.

As the chart shows, there was some resistance to falling stock prices over this period as investors turned this lack of complete confidence in the Fed’s leadership into rising stock prices.

This is the main reason why Mr. Powell felt he needed to speak out in Jackson Hole last Friday. Mr. Powell felt he needed to be a little dramatic and convince investors that he really meant what he said about the Federal Reserve tightening.

The Fed… he emphasized… would stick to it.

So there you have it.

Or not

But there are still doubters.

Prominent analysts such as Mohamed El-Erian spoke out in the Financial Times.

Thomas Sargent and William Silber spoke out in the Wall Street Journal.

And Niall Ferguson spoke out on CNBC.

The basic feeling of these speakers is that Mr. Powell has not really gone far enough and is unwilling to admit that the Fed has massively injected liquidity into the financial system since early 2020 and the start of the fight against the effects of the Covid- 19 pandemic.

By not accepting the magnitude of monetary expansion and by not accepting the magnitude of what really needs to happen, Mr. Powell and the Federal Reserve are unable to do everything that needs to be done to correct the inflationary situation.

Therefore, the feeling is that Mr. Powell will withdraw at some point because the magnitude of the work he has to do has not been fully recognised.

Why do people feel this way?

Well, because mr. Powell initially believed the initial inflation surge was “transient”.

Supply-side factors would soon be present.

And so on.

Moreover, during the Fed’s response to the Covid-19 pandemic, Mr Powell has always wanted to side with monetary convenience.

mr. Powell has consistently shown that he is afraid of making a mistake that will lead to bad things.

And the investment community recognizes this pattern of behavior. Therefore, the investment community is unwilling to fully “trust” that this man will do whatever it takes to fight inflationary pressures.

So there are still doubters.

For example, I believe that these doubters have some justification for holding onto their doubts.

So we have to live with this unknown… this uncertainty.

The Stock Market and the Federal Reserve

Well, here we are spending another weekend worrying about the stock market and the Federal Reserve.

This tells us to me the whole story about the problems we are facing.

As I’ve said before, if the Federal Reserve has done its job and is actually doing its job, you don’t hear much about central banks and what’s going on.

Lately, almost all discussions about what’s happening in the stock market involve debates about Federal Reserve actions. The stories are dominated by the presence of the Fed.

This is not how it should be.

The Federal Reserve is involved in these current discussions because the Fed is not doing its job, has not done its job, and this gives us no confidence that it will get the job done in the future.

This radical uncertainty is not necessary at this point.

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