Stock markets close half of the worst since 1970, Federal Reserve hawkish monetary policy stance to fightInflationhas moved to. The Federal Reserve will raise market liquidity 950 a month this fall by not only raising the policy rate at 75 basis points instead of the usual 25 basis points, but also by not rolling over maturing bonds. We are on the road to withdraw $ 100 million. Holding.
Before hitting the monetary policy brakes too hard and causing unnecessary damage to the economy, the Fed thinks about the current stalkingFate LoopYou may want to. Economy. Not only can a downturn have a major negative impact on stock market prices, but a fall in stock prices can have a major impact on the economy. As a result, it could be another foothold in the stock market.
The recession outlook will hurt the stock market by overshadowing the company's earnings outlook. The lower the future returns, the lower the price investors are ready to pay for the shares of those companies.
This consideration is even more important for the price-earnings ratio of the market. The ratio is well above the long-term average. The last thing the market needs right now is a downgrade of corporate earnings outlookdue to the imminent recession. This is especially true if the price-earnings ratio is returning to average due to the Fed's higher interest rates.
The link between the economy and the stock market is bidirectional. While a downturn can push down stock prices, a downturn in the stock market can also cause an economic slowdown.
A significant decline in the market disrupts the economy by clearing household wealth. Thepeople who felt less wealthy than before cut their spending onto replenish their depleted savings. According to a previous Federal Reserve survey, people could cut spending by 3-5 cents for every dollar of persistently declining wealth.
A stock market downturn can also impact the economy by raising prices at which companies can raise new capital. With rising cost of capital and lower consumer spending, businesses find it wise to shrink their investment plans, thereby further pushing down the economy.
The Fed seems to ignore the negative asset effects on the crisis economy. Already earlier this year, about $ 9 trillion in equity assets were wiped out. To make matters worse, the bloody stock market was accompanied by a large bond market loss and a de facto collapse of thecryptocurrency market. In total, about $ 14 trillion in household wealth (70% of GDP) was eliminated in the first half of this year due to lower financial market prices.
Even with the Federal Reserve's lower limit estimates of how wealth losses affect spending, this year's losses have caused households to spend as much as 2% of GDP. May be reduced. In this situation, the last thing the economy needs is a further decline in the stock market, which will cause a further recession in household spending. This is especially true if the Fed has plunged mortgage rates and disrupted the housing market.
Last year, by keeping interest rates too low and flooding the market with liquidity, the Fedreleased the genie of inflation from the bottle, causing a stock bubble. .. Today, the Fed runs the risk of creating a downward spiral in the market economy by raising interest rates rapidly and eliciting market liquidity more rapidly than ever before.
We strongly hope that the Fed will understand the risks associated with the economy and overly withdraw its hawkish policy stance before it is too late. However, given the Fed's record of poor policy decisions in the past, it is not advisable to hold your breath.
Desmond Lachman is a Senior Fellow at the American Enterprise Institute. He was previously Deputy Director of the International Monetary Fund's Policy Development and Review Division and Chief Emerging Markets Economic Strategist of Salomon Smith Bernie.