The possible reason for the decline, according to the analysis: Worry in which Powell along with the Fed by extension aren’t understanding the current landscape.
“Specifically, the equity market likely implies in which the Fed is actually underestimating various risks, along with hence is actually increasing the implied probability of the Fed committing a policy error inside the future,” Marko Kolanovic, global head of quantitative along with derivatives strategy, wrote inside the report. “A higher probability of a policy error translates into lower equity prices on the news.”
Overall, the market has done quite well This specific year.
The S&P 500 has risen about 9.6 percent, even though the Fed has increased interest rates three times. Powell has repeatedly said in which he believes the economic outlook is actually strong along with in which This specific is actually a Great time for the central bank to normalize policy after years of an ultra-accommodative stance.
However, the market hasn’t liked what the item has heard specifically by him — along with neither has President Donald Trump.
Trump has criticized the Fed on several occasions, a move unusual for a president, saying he is actually worried the Fed’s insistence on raising interest rates could cost the economy the substantial momentum the item has built up since the 2016 elections.
The J.P. Morgan paper said there appears to be direct causation between Powell’s remarks along with stocks because the market had taken a discernible change in direction during the days when the Fed chief spoke.
The bank cited three troublesome statements by Powell: in which stocks are overvalued, in which multiple rate hikes are needed or necessary, along with in which a stock market “sell-off warrants attention if sustained.” Kolanovic said in which implies the Fed doesn’t understand market structure along with may stay on the sidelines too long.
“If fundamental investors start questioning the cycle, a technically driven sell-off could be more violent along with more likely to deliver a knock-out punch to the economic cycle,” he wrote. “The fresh microstructure of financial markets would likely not leave enough time for the Fed to react.”
CNBC has contacted the Fed for comment.
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