Excessive optimism can do harm
Everyone’s a liar
A sheep was afraid of wolves its whole life, but it was the shepherd that killed it. They scared bulls in US stocks with lots of things: Delta, the US economy passing its growth peak, the debt ceiling, and the drastic rally of yields on treasuries. Still, it’s the Fed that will be most likely blamed for the S&P 500‘s correction. The Fed that hand-fed the stock index with cheap liquidity. The shepherd that always suggested the monetary policy would come back to normal slowly. The suggestion that a market that strong can swallow easily!
Which is easier: to be boring but wise, or funny but marasmic? Ex-Fed Chair Janet Yellen’s addresses often made one yawn as she would constantly chew over and spell out information. Jerome Powell can hardly be called “marasmic,” but he can “lull” markets as well as the current minister of finance. Investors believed that high inflation was temporary and the federal funds rate would be raised in 2023 more than FOMC members. All was the other way round when the Fed raised the rate in 2015-2018: the forward market ran ahead of the central bank. However, looking back in the past may not be worthwhile.
The ultimate and the penultimate recessions are different in many aspects, indeed. However, the Fed is experienced enough to feel at home. It can talk nonsense about the slow pace of monetary policy normalization and actively withdraw liquidity from the market using reverse repo operations. Isn’t that nonsense?
And who said there’s little nonsense in the markets? Congress must vote every two years to approve borrowing and thus finance the costs already accepted by the lawmakers. And the ceiling isn’t actually a ceiling as Uncle Sam can continue borrowing even upon reaching it. Comedy, right?
Or, for example, look at the Bank of England that had praised QE to the skies up to August’s meeting. They said it was too early to shrink the bond-buying program as that would hamper economic recovery. Then, the Monetary Policy Committee cut the bank rate from 1.5% to 0.5% and upgraded the inflation forecast to 4%, thus increasing the chance of monetary restriction in as early as 2022.
They feed markets with information totally opposite to what they actually do, and then they’re surprised to have an inadequate reaction. The Fed, Congress, and White House turned the crowd into optimists, but optimists hope to fail to hit the ground when they fall. Everyone is sure that the S&P 500‘s pullback is a reason for buying cheaper stocks. What if they are wrong? What if the good things aren’t about to happen because they have already happened? What will be the result of all that nonsense?
Price chart of SPX in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
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