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The Fed’s Tendency To Revert Is The Biggest Threat To The Stock Market

Despite many doomsday forecasts, stocks have continued to grow this year. Even with the 2% decline from last week, the S&P 500 has increased by more than 17% so far in 2023. Nothing has been able to stop the surge, not rising interest rates, falling earnings, the protracted crisis in Ukraine, or China’s worse-than-expected economic situation.

Policy Mistake

Even though the Federal Reserve is nearing the conclusion of its cycle of rate increases, some strategists and economists continue to criticize it. The frequently mentioned “long and variable lags” of rate hikes are to blame for this. That is, the effects of these increases on the economy are gradual and unequal.

There is still opportunity for the central bank to make a “policy mistake,” according to Mohamed El-Erian. The head of Queens’ College, Cambridge University, and an advisor to Allianz both recently spoke with Yahoo Finance. He has frequently emphasized the robustness of the American economy while also warning against such an error.

My main concern is that the Fed will tighten too much and continue to pursue a 2% inflation objective, which is insufficient given the structural and supply-side factors of the present.

Inflation

Stock

Source- Forbes

“My major concern is that by the end of the year, headline inflation will start increasing once more. If the Fed continues to be overly dependent on statistics at that time, it will be in a very difficult situation, and we don’t want that. To target medium-term inflation and prevent unduly harming economic growth in reaction to short-term data, we urge the Fed to adopt a long-term perspective.

Not just him but others are concerned about the Fed. The markets and the economy, however, have consistently disappointed market participants throughout the year. Even though the Fed theoretically has the ability to stifle growth, a jump from zero to 5.5% in little over a year hasn’t done so.

“If you look at any recession over the last 60 to 70 years, the one unifying factor, the one common denominator, has been an overzealous Fed,” said Jack Manley, global market strategist at JPMorgan Asset Management.”I wouldn’t say this time is any different, but I also don’t think – at least in the first half of next year – that it’s a done deal.”

Due to the fact that they are already anticipating when the Fed will begin lowering interest rates, investors may not be as concerned about the Fed at this time.

The Fed governors expect rates to be lower by the end of 2024, according to the June summary of economic predictions, sometimes known as a dot plot. With the bulk of futures bets pricing in a range of 3.75% to 4.25% by December of next year, market players are on the same page.

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