Did Fed Hint Investors To Sell Stocks And Buy Dollar?

May 23, 2022

| Fullerton Markets

Did Fed Hint Investors To Sell Stocks And Buy Dollar?">

As a major support system for Wall Street, the Fed is going its own way these days, taking on the inflation fight. Its leading officials say it is pivotal to protect the U.S. economy, even if it means weakening growth and possibly raising the unemployment rate. A higher Dollar, and lower stock and crypto prices may last for some time.

Fed policy is now entirely about reducing inflation before it becomes so embedded that it permanently raises the U.S. government’s cost of capital. Failure is simply not an option, and stocks and FX investors are beginning to understand that.

The Fed is in the early stages of a rate-hiking cycle that markets expect will continue, with the central bank’s benchmark funds rate expected to rise to 2.75%-3% by year-end. In addition, a balance sheet reduction program will start in June that should siphon off a good chunk of the $9 trillion in assets the Fed is holding.

Markets have responded with a significant run-up in bond yields and are selling risky assets like stocks that may not hold up well under the new monetary policy regime. The chances of a “Fed Put” coming in to stop the bleeding in financial markets seems remote. The famous “Fed Put” has shifted its target from supporting stock prices to the Treasury market. It can afford higher rates over the short term to quell inflation, but it cannot abide by them over the long term.

Stock prices may get lower

Chair Jerome Powell said last Tuesday that the Fed would need “clear and convincing” signs that inflation is coming down before halting rate increases. While not saying the Fed did not care about stocks, he said the move in the markets is appropriate considering what the central bank is trying to accomplish. He also added it has been good to see financial markets reacting in advance based on the way we are speaking about the economy.

The Dollar may get higher

Kansas City Fed President Esther George said the Fed is looking to tighten financial conditions, and dollar value is one of the features. They are looking for the transmission of the policy through the market’s understanding and tightening should be expected. It is not aimed at the equity markets, but it is one of the avenues through which tighter financial conditions will emerge.

The Fed skirting a recession remains the baseline expectation on Wall Street, but that is slowly starting to change. Rate-sensitive stocks are taking the worst of it, even though consumer names were hit hard this week after Walmart and Target both issued disappointing earnings reports as executives expressed concerns over rising costs and changing behaviour among shoppers.

This means that while a rebound in risk assets looks likely in the near term given the extent of the selloff in the past month, the mounting of recession risks shows we are still in an environment where investors are better served fading the rallies than buying the dips.