The 'Fed put': if stock markets fall by 20-25%, central banks will ride to the rescue by cutting interest rates & increasing money supply via QE. The logic is that the world has so much debt that failing to act would incinerate the financial system. But...
theconversation.com/stock-markets-…
theconversation.com/stock-markets-…
A drop of more than about 25% could set off a chain reaction of bad debts that could destabilise the biggest banks and cause a crisis that would make 2008 look mild.
As the global economy shut down in the face of the COVID pandemic, the Fed then swung into full rescue mode.
As the global economy shut down in the face of the COVID pandemic, the Fed then swung into full rescue mode.
The Fed announced the most aggressive QE programme to date to support the economy, and the balance sheet ballooned to nearly US$9 trillion by late 2021.
The result of all this easing has been a huge surge in asset prices – not only stocks and bonds but also property.
The result of all this easing has been a huge surge in asset prices – not only stocks and bonds but also property.
Though it’s difficult to estimate the effect, the wealthiest 10% in the US now own over 60% of assets, while the poorest 50% own less than 6%.
Coming out of the pandemic means the labour market is robust and lower-skilled workers are finding new opportunities with higher wages.
Coming out of the pandemic means the labour market is robust and lower-skilled workers are finding new opportunities with higher wages.
Yet consumer confidence is low, which is partly due to high inflation. Consumer prices in the US rose by a staggering 7.5% over the 12 months to January 2022, the largest since the early 1980s, while the situation has been similar elsewhere, including here in the UK.
The big fear is that workers begin demanding equivalent pay rises in response. This could cause a wage-price spiral in which producers further raise their prices to pay for higher wages, sparking further wage demands and so on – essentially making inflation a longer-term problem.
Raising rates and winding down QE should be much more achievable with today’s healthier financial system, but it is therefore much less likely that the central banks will rescue the financial markets from a crash by U-turning on tightening out of fear that the system won’t cope.
How far markets fall as the economy slows down depends on many things, not least the Ukraine-Russia conflict and the path of inflation.
But with the Fed put /QE arguably no longer in play, everyone from pension holders to retail investors should tread very carefully. 🤞
But with the Fed put /QE arguably no longer in play, everyone from pension holders to retail investors should tread very carefully. 🤞
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