The Fed is officially in a nail-biting showdown with Wall Street
After years of being able to count on low interest rates, market participants now face uncertainty about how the Federal Reserve could react to the possibility of higher inflation.
This concern was a driving factor of the stock market’s correction.
The sell-off coincided with a changing of the guard at the helm of the central bank.
Federal Reserve Chair Jerome Powell had quite an eventful first week on the job.
It coincided with the worst week for the stock market in two years, which saw the S&P 500 fall 5.3%.
The changing of the guard was just one way in which a new era for America’s central bank started — one that made investors uncomfortable this week.
Through most of former Fed Chair Janet Yellen’s term, market participants could count on a stable interest rate environment: no increases in rates, or at most, a very gradual pace of hikes. According to Larry Hatheway, the chief economist at GAM Investments, this assurance was one of three legs that supported the stock market — until now. Improving global growth and the consequent rise in corporate earnings were the other two.
“As soon as you begin to throw that uncertainty into the equation, you erode one of the cases for the valuations that equities had reached globally as well as in the United States,” he told Business Insider. “A world in which central banks previously not thought to be in play come into play becomes a much bigger issue for markets.”
Although the economic odds are stacking up against him, Powell could end up being as calculated as Yellen. Some economists saw Powell as the Trump administration’s way of renewing Yellen’s term — and dovish temperament — without retaining a former administration’s appointee.
Stock-market stability is not one of the Federal Reserve’s mandates from Congress, although the central …read more
Source:: Business Insider