(TheRedWire.com) – The US economy is a massive robust interwoven system. At times what is best for one part of the economy is bad for other sectors. In March, early warning signs indicated inflation was beginning to occur. At first, economists said they expected prices to rise as people returned to work and started shopping again. In the wake of the pandemic lockdowns, the economy had nowhere but up to go.
As summer turned to fall, a picture emerged showing inflation might not be as transitory or temporary as either the Federal Reserve or White House predicted. Some economists suggested it was never a short-term issue, and the Federal Reserve and Congress were largely to blame for the new economic crisis. As the Fed begins to enact a reversal of pandemic policies, Big Banks begin sounding alarms to investors about other impending challenges potentially facing equity markets.
Big Banks Express Concern About Federal Reserve Policy
Some economists argue the skyrocketing inflation America is experiencing results from the nearly $2 trillion COVID relief bill passed by Democrats in March and the Federal Reserve’s massive monthly cash infusions into the US economy. The Federal Reserve has two primary means of controlling the surging prices of goods:
- Cut back or eliminate the purchase of assets that pump trillions of dollars into the US economy.
- Raise interest rates to take money out of the economy to slow down consumer demand, thereby allowing supply to catch up and prices to drop.
In the upcoming December Federal Reserve meeting, the board expects to cut asset purchases by March, followed by an interest rate hike. Through most of the pandemic, the Federal Reserve purchased $120 billion in bonds every month, injecting that money into the US economy to keep credit inexpensive and ensure financial markets remained stable.
New Federal Reserve Policy Impacts Stock Market More Than Omicron Variant
While the Fed fights inflation, it’s likely to have a negative impact on the stock and equity markets such as the S&P and Nasdaq. The stock market benefited heavily from the injection of cash into the economy and corporations through the Fed’s policies. As the Federal Reserve cuts back and eliminates the money in the market, it’s bound to show up in tightening profit margins for companies.
Lower valuations of corporations mean the stock market is due for a correction. That could result in a significant lowering of stock values. Morgan Stanley stock strategists suggest this is a normal part of the economy correcting during this stage of recovery.
While the Fed corrects inflation, stocks are bound to take a hit. Yet, Federal Reserve Chairman Jerome Powell suggested equity markets may not take a big hit. For one, Powell says they telegraphed their move months ahead so it wouldn’t be a shock to the system. As a result, the chairman doesn’t think the Federal Reserve’s actions will disrupt the market.
Clearly, the big banks don’t agree.
Regarding Omicron, on Wednesday, December 8, Dr. Anthony Fauci stated the new variant appears to be less severe than the Delta variant. Still, he said researchers need more data. Big banks don’t seem concerned this variant will harm the economy.
By April, we’ll see how the equity markets correct for the changes implemented by the Federal Reserve.
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