NEW YORK- The Federal Reserve’s determination to raise interest rates until it squashes the highest inflation in decades is darkening the outlook across Wall Street, as US stocks stand on the cusp of a bear market and warnings of a recession grow louder.
At issue is the so-called Fed put, or investors’ belief that the Fed will take action if stocks fall too deeply, even though it has no mandate to maintain asset prices. One oft-cited example of the phenomenon, which is named after a hedging derivative used to protect against market falls, occurred when the Fed halted a rate hiking cycle in early 2019 after a stock market tantrum.
This time around, the Fed’s insistence that it will raise rates as high as needed to tame surging inflation has bolstered the argument that policymakers will be less sensitive to market volatility – threatening more pain for investors.
A recent survey by BofA Global Research showed fund managers now expect the Fed to step in at 3,529 on the S&P 500, compared with expectations of 3,700 in February. Such a drop would constitute a 26 percent decline from the S&P’s Jan. 3 closing high.
The index, which closed Friday at 3,901.36, is already down almost 19 percent from that high this year on an intraday basis – close to the 20 percent decline that would confirm a bear market, according to some definitions.
“The Fed has bigger fish to fry and that’s the inflation problem,” said Phil Orlando, chief equity market strategist at Federated Hermes, who is increasing his cash levels. “The ‘Fed put’ is kaput until the central bank is confident that they’re no longer behind the curve.”
