Displaying items by tag: fed put

(New York)

JP Morgan’s head of research, famed analyst Joyce Chang, published some very interesting views this week. She argues that the pandemic has forever changed financial markets, and highlights what she says are four “paradigm shifts” that COVID has caused. The biggest of those from a market direction perspective is about the Fed. She contends that the huge and extraordinary measures central banks have undertaken in the last few months have fundamentally changed the role of central banks towards financial stability (something they were arguably already focusing on).

FINSUM: In our mind it has become very obvious over the last few years, and especially during the pandemic, that the Fed’s most important mandate is financial stability.

(Washington)

The market has the idea that the Fed holds a massive “put”. The concept entails that the Fed can effectively set a floor on asset prices because it can take dovish action to support markets at any point. However, that notion is problematic at the moment because a rate cut in the near term may actually induce a correction. In fact, markets look set for a lose-lose scenario. On the one hand, if the Fed does not cut rates, markets will be very disappointed and slump. On the other hand, investors have already priced in a near 100% chance of a rate hike, so it happening won’t give markets much of a boost and is more likely just to make investors worry that the economy is headed south.

FINSUM: We hate to say it, but we kind of buy into this view. Maybe not so much that markets will fall even if the Fed cuts rates, but the cuts certainly won’t be overly supportive at this point and may lead to a gradual decline.

(Washington)

Markets are currently experiencing a great deal of volatility. The Nasdaq is in a correction and the Dow and S&P 500 have shed all their gains for the year. One of the big reasons why is investors’ fear of rising rates. With that in mind, many are hoping the central bank will save markets via the so-called “Fed put”, or the idea that if things get bad enough, the Fed will come in as a backstop with some sort of measure to boost asset prices. However, the truth is that Wall Street says we are not nearly deep enough into a correction/bear market for the Fed to take any sort of accommodative action.

FINSUM: Powell is much more hawkish than Yellen or Bernanke and we have no illusions that there is going to be any sort of supportive measure in the near term. We expect hikes to continue.