2022 – Stock boom causes Powell’s headache as financial conditions ease By Bloomberg


© Reuters. Stock recovery worries Powell as financial conditions calm

(Bloomberg) – The recovery of risky assets could be a problem for the Federal Reserve, which is trying to rein in excesses in all markets.

Stocks rose solidly from their lows in mid-May and credit spreads narrowed to levels seen before interest rates were raised in March, while the Bloomberg Spot Dollar Index cooled off from a two-year high hit earlier this month. Taken together, the Bloomberg US Financial Conditions Barometer – a multi-asset measure of market health – is back to levels seen before the March rate hike.

That could pose a problem for policy makers, as Fed Chairman Jerome Powell has repeatedly said that financial conditions will deteriorate as the central bank withdraws monetary support to combat the hottest inflationary readings in four decades. If price pressures build and growth remains strong while markets continue to recover, the Fed may need to tighten the reins even more, according to Dennis DeBusschere, founder of 22V Research.

“The mechanism by which the Fed affects the real economy is through the channel of financial conditions,” Debucherie said on Bloomberg Television. “Unless the data slows, financial conditions will be forced to tighten further.”

The easing in conditions comes after a week in which almost everything from speculation to blue-chip stocks surged as traders scaled back interest rate hike expectations, causing Treasury yields to fall. En route to its biggest rally since 2020, the company posted its longest streak of weekly losses in a decade, while a basket of non-performing tech stocks ended a seven-week decline.

Strategists Morgan Stanley (NYSE: 🙂 The stock jump last week is nothing more than a hiccup amid a broader drop, especially as the Fed is keen to cool demand.

“As stock prices rise, the Fed is getting more hawkish,” Morgan Stanley’s Michael Wilson wrote in a report on Tuesday. “Investors may underestimate the Fed’s willingness to shock markets if needed to meet inflation targets.”

© Bloomberg LP 2022