In retrospect, bulls should maybe have been more worried that one of the most reliable tools the Federal Reserve has for subduing inflation is to scare the U.S. equity market. They’re getting the message now.
In retrospect, bulls should maybe have been more worried that one of the most reliable tools the Federal Reserve has for subduing inflation is to scare the US equity market. They’re getting the message now.
If the central bank is to defeat inflation, “the equity market will be the catalyst, not the observer,” wrote Steven Blitz, chief US economist of TS Lombard. “With prices, employment and wages lining up to give spending a boost, the Fed is only left with driving down equities in order to reverse growth.”
Fluctuations in share prices potentially affect or predict the direction of inflation through several channels, including what Ramsey and others call a “negative wealth effect.” With so much American money tied up in equities, and the market sitting at levels well above the dot-com peak despite this year’s rout, an equity slump may hurt consumer demand, helping put a lid on inflation.
Plotting consumer expectations and the S&P 500’s change over three months, Blitz at TS Lombard found the two have tracked each other pretty closely in recent years. The wealth effect is important, he said, especially since a growing number of American households own equities through 401 accounts. “The Fed really is trying to tighten financial conditions whether it’s through slowing down demand through interest rate increases and quantitative tightening, or through other factors such as what’s going on with the comfort of consumers and companies to spend,” Lisa Erickson, senior vice president and head of public markets group at US Bank Wealth Management, said by phone.
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