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Thursday, September 23, 2021
The famed 'Fed put' is alive and well.
The Federal Reserve isn’t entirely asleep at the switch on soaring prices, and doesn’t appear to be committing a policy error — at least not yet.
Those were the main takeaways from Wall Street’s reaction to the Fed’s policy decision, which sent a market addled by Evergrande on a tear. As expected, Fed Chairman Jerome Powell hinted that the long-awaited, gradual pullback in the pace of its stimulative bond-buying was nigh.
Investors rejoiced, mollified by the Fed’s reassurance that it would not suddenly snatch away the punch bowl that’s helped keep benchmarks perched near record highs in the face of COVID-19. Thus, did the vaunted "Fed Put" remain intact, with asset prices jumping in appreciation.
“There has been a great deal of handwringing by some market participants over the potential market implications of the Fed’s eventual tapering of asset purchases, and a great deal of ink spilled on the topic too,” said Rick Rieder, BlackRock’s CIO of global fixed income, on Wednesday. “But at the risk of merely contributing to the latter, we hope to assuage those who worry about the former.”
In a note to clients, Rieder wrote that, “In sum, we think that the tapering of Fed asset purchases (likely a $10 billion reduction in U.S. Treasury purchases and a $5 billion reduction in agency mortgages per month) is likely to have minimal market impact at this stage.”
He added: “This is partly because the Fed has done a decent job of telegraphing when tapering is likely to begin (most market participants believe the announcement will come this year), but more importantly it’s because the asset purchase reductions are likely to be trivial when seen in the context of how large the fixed income markets are today, and how overwhelming the demand for income has become.”
The word “demand” is pivotal to explaining why yields remain low (massive Fed buying and voracious institutional appetite for both corporate and government debt), even as risk-sensitive assets keep soaring.
It has created a dynamic which Sam Stovall at CFRA Research has made stock investors “quite spoiled” at the mere suggestion of a correction, usually defined as a 10%-20% drop — or even a more modest dip.
“On Monday...even though nervous investors and the financial media made it sound as if a new financial crisis was at hand, the S&P 500 (^GSPC) fell less than 2% on the day,” Stovall pointed out — a comparatively marginal drop that he dismissed as “just noise.”
He added that since hitting a fresh high on Sept. 2, the broader market has only given back 4% from peak to Tuesday’s trough.
“As a result of today’s FOMC meeting-conclusion relief rally, the market has still not undergone a refreshing dial reset of 5%+ on a closing basis, and therefore remains the 9th longest advance between 5%+ declines since [World War II],” the analyst wrote.
“While a meaningful decline is still just a matter of time, it doesn’t appear as if now is that time,” he added.
So what would make the Fed move the needle in a faster (or theoretically even more accommodative) pace of policy normalization? Well, that would be the jobs market, which remains improbably hot even after August’s payrolls letdown — just ask FedEx (FDX), which on Wednesday stunned investors with its assessment of labor conditions.
“One message from today is that tapering is now effectively on cruise control (let’s not say autopilot),” said JPMorgan Chase economist Michael Feroli on Wednesday.
“With that issue receding, the next question is liftoff timing, and Powell stated that will depend on ‘labor market conditions consistent with maximum employment.’ He followed this up by admitting that there are conflicting signs as to how far we are from meeting that test,” Feroli added.
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