Angle: “FRB put” cannot be expected even if US stocks fall sharply, priority is given to inflation | Reuters

[New York, 20th Reuters]–The Federal Reserve Board (FRB) has announced that it will aggressively raise interest rates in response to high inflation, and will face a recession as US stocks enter a bear market. There is a growing sense of caution.

On May 20, the Federal Reserve Board (FRB) announced that it would aggressively raise interest rates in response to high inflation, and was wary of a recession as US stocks entered a bear market. Is increasing. Taken in March at the New York Stock Exchange (2022 Reuters / Brendan McDermid)

What is attracting attention is the “FRB put”, in which the Fed moves in response to investor expectations if the stock price plummets. There was also an FRB put when the Fed stopped its rate hike cycle in early 2019 following a sharp fall in US stocks.

Meanwhile, the Fed has argued that it will raise rates as much as necessary to curb high inflation, with policymakers saying it doesn’t care too much about market volatility, which could hurt investors even more.

According to a recent study by Bank of America Global Research, asset managers now expect the Fed to move if the S & P Total 500 drops to 3529. At the time of the February survey, this level was 3700. The level of 3529 will be 26% lower than the closing price on January 3.

The closing price on the 20th of the S & P Total 500 was 3901.36. It has already dropped by nearly 19% from the highest price this year on a market basis. It has recorded a drop close to the definition of a bear market (down 20%).

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Phil Orlando, chief equity strategist at Federaled Hermès, said the Fed has a bigger problem, which is inflation-responsive. He explained that he couldn’t expect the Fed put until the Fed was convinced that monetary policy wasn’t behind.

As a result, some investors are increasing their cash share in anticipation of long-term stock price depreciation. According to a Bank of America survey, the cash allocation ratio is at the highest level in 20 years. On the other hand, the direction of expecting a decline in technology-related stocks is the highest level since 2006.

The S & P Overall 500 dropped sharply on the 20th, but ended almost flat. It has fallen for the seventh straight week, the longest since 2001.

Jason England, global fixed income portfolio manager at Janus Henderson Investors, said the FRB tightened as stocks more than doubled from their March 2020 lows with support from unprecedented monetary policy. The index needs to fall by at least another 15% to slow down, he said.

“The Fed has clearly shown that it will be painful in the future,” he said.

On the other hand, there are signs that sentiment is improving. The Chicago Board Options Exchange’s (CBOE) volatility index (VIX), which shows investor anxiety, remains high, but below the levels recorded during the sharp drop in stock prices so far.

Zuma Wealth’s chief investment officer, Terri Spath, said some investors may be buying stocks that have dropped significantly. “There are signs that the Fed will no longer be needed as the last buyer,” he said.