Why the Fed wants to see a strong dollar and falling stock prices: Morning Briefing

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Thursday, September 8, 2022

Today’s bulletin is from Jared Bleecker, Yahoo Finance’s markets-focused reporter. Follow him on Twitter @SPYJared.

The Nasdaq Composite (^IXIC) rose 2.1% on Wednesday, ending a seven-day losing streak that again disappointed the bargain-hunt crowd.

The problem is that rising stocks are the last thing the Federal Reserve wants to see.

Sudden reversals of fortune – both up and down – are common illiquid bear markets.

But Wednesday’s rally defies the Federal Reserve’s doubling (or tripling) on ​​its firm determination to curb runaway price inflation.

On Wednesday before the opening bell, a a report from the Wall Street Journal’s top Fed whisperer, Nick Timiraos caught the attention of investors, with the report suggesting that the central bank will raise interest rates by 75 basis points later this month.

The move would mark a continuation of the Fed’s summer gambit to tackle inflation by curbing anything that stands in the way of that fight. Which in this case means tightening the financial conditions.

The simple outline of tighter financial conditions is a stronger US dollar, wider spreads between bond markets and lower stock prices. The lucky bulls of capital should read this sentence again, for they remain, de facto, fight with the Fed.

All other things being equal, tighter financial conditions require investors and consumers to be more conscious about where and how they spend and borrow.

At the end of August, when Fed Chairman Jay Powell gave a direct speech in Jackson Hole, telling investors the Federal Reserve would raise interest rates “until the job is done,” reducing inflation, sending markets selling off. Message received. Tighter financial conditions.

Minneapolis Federal Reserve President Neel Kashkari made waves last week when he admitted he preferred that market reaction to what has been seen since the Fed’s July FOMC meeting. Which was a market rally with the S&P 500 up 2.6% and the Nasdaq up more than 4%.

“I certainly wasn’t thrilled to see the stock market rally after our last Federal Open Market Committee meeting,” Kashkari said in an interview with Bloomberg.

And while the Federal Reserve has a third “shadow mandate” for financial stability — its official goals are stable prices or 2% inflation and maximum employment — no target for the S&P 500 has yet been added to the Fed’s congressional mandate.

Still, these tighter financial conditions that Fed officials are pushing for have some potentially significant positive effects in the Fed’s fight against inflation. A stronger dollar increases the purchasing power of US consumers, lowers global commodity prices, and in turn helps ease commodity prices. All of this is disinflationary, just what the Fed would want.

As Fed Vice Chairman Leyl Brainard said in a speech on Wednesdayprofit margins in several industries remain high after last year’s boom, and firms appear willing to accept lower margins as consumers react negatively to higher prices.

And as an added bonus, the rising greenback is also putting pressure on cryptocurrencies – this a perennial thorn in the side of US regulators.

The Federal Reserve is also expressly pleased that lower stock prices reduce the “wealth effect” of the nation’s wealthiest and their associated spending. As long as this “flows” to the working class, the Federal Reserve is willing to tolerate some increase in misery if his broad strokes succeed in stuffing the inflationary genie back into the bottle.

At best, it may seem counterintuitive that the Fed’s dual mandate amounts to a Faustian bargain — balancing the need to administer trillions in stimulus while bailing out a red-hot labor market.

But this is where we find ourselves in an inverted 2022.

And like Powell reminded investors last monthhistory remains the manual for his Federal Reserve.

Federal Reserve Chairman Jerome Powell walks in Teton National Park, where financial leaders from around the world gathered for the Jackson Hole Economic Symposium outside Jackson, Wyoming, U.S., August 26, 2022. REUTERS/Jim Urquhart

Federal Reserve Chairman Jerome Powell walks in Teton National Park, where financial leaders from around the world gathered for the Jackson Hole Economic Symposium outside Jackson, Wyoming, U.S., August 26, 2022. REUTERS/Jim Urquhart

“Our discussions and decisions about monetary policy are based on what we have learned about inflation dynamics from both the high and volatile inflation of the 1970s and 1980s and the low and stable inflation of the past quarter century Powell said, pointing to three lessons from history.

First: The Fed takes responsibility for inflation and pushes back at first glance. Second: Don’t let public expectations mess with your 2% inflation target. Third: Follow the “until the job is done” policy.

“These lessons guide us as we use our tools to reduce inflation,” Powell said.

“We are taking strong and swift steps to moderate demand so that it is more in line with supply and keep inflation expectations fixed.” We will continue to do so until we are sure the job is done.”

And OK monitor the markets for signs that we have reached the end of this journey.

What to watch today

Economic calendar

  • 8:30 a.m. ET: Initial unemployment claimsweek ended September 3 (240,00 expected, 232,000 prior)

  • 8:30 a.m. ET: Continuing Claimsweek ended May 21 (1,435 expected, 1,438 prior)

  • 3 p.m. ET: Consumer creditJuly ($33.0 billion expected, $40.15 previously)

Profits

  • American Outdoor Brands (AOUT), DocuSign (DOCU), Fuel cell energy (FCEL), National drink (PHYS), RH (RH), Zumiez (ZUMZ)

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