While the Fed may be ambivalent about equities in general, the role of markets in mediating a real-world economic lever -- financial conditions -- means they are never completely out of mind.
Right now, those conditions are loosening in proportion to the S&P 500’s gains. Could that be a concern for Powell?
“They don’t want easier financial conditions, because they want lower demand,” Bespoke Investment Group global macro strategist George Pearkes said. “Basically, markets are assuming we’ve hit peak hawkishness and we’ll be easing sooner than expected. I’m skeptical the Fed is going to endorse that.” The risk-on impulse spread to corporate bonds, with both investment-grade and high-yield spreads narrowing from peaks earlier in the month as traders trimmed wagers on an ultra-aggressive Fed. Treasury yields dropped across the curve as well, with 10-year Treasury yields dropping to 2.65 per cent after reaching 3.5 per cent in June.
“If the Fed’s goal by raising interest rates is to slow the economy by tightening financial conditions, then that hasn’t happened since they started to get more serious about rate hikes,” said Nick, chief investment strategist at Nuveen. “I’m afraid we’re in for another instance of what’s become very familiar, which is the Fed has to bring the party to a halt at its next meeting or before that.”
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