It was a “don’t make me go back there” moment from the Federal Reserve.
A line from minutes of the central bank’s December monetary policy meeting, released Wednesday afternoon, was taken by analysts and economists as a warning to financial market participants that bets on a policy shift in 2023 are unwelcome. And to the extent that stock rallies and other financial market developments ease overall financial conditions, these bets will only force the Fed’s policy-making Federal Open Market Committee to prolong the pain necessary to bring inflation down.
Read: No Fed official expects a rate cut this year to be appropriate, meeting minutes show
Here is the line: “Participants noted that since monetary policy functioned to a large extent through financial markets, unwarranted easing of financial conditions would complicate the Committee’s efforts to restore price stability, particularly if justified by a misperception of the responsiveness function of the Committee would be caused by the public. ”
In plain English? “Translated from Fedspeak, FOMC members do not like stock market rallies, fearing it could lead to potentially inflationary consumer spending,” Louis Navellier, president and founder of Navellier & Associates, said in a statement Thursday.
And what can the Fed do about it?
“In other words, if stocks continue to rise on bad economic news, the Fed needs to push for an even higher terminal rate and unofficially expand the mandate to include ‘weaker stocks,'” wrote Ian Lyngen and Benjamin Jeffery, rates strategists at BMO Capital Markets, in a statement dated Wednesday.
“The minutes revealed another deliberate attempt to deter the market from the notion that the Fed’s put will be triggered in 2023,” they wrote.
Archive: The Fed needs to “inflict more losses” on stock market investors to tame inflation, says former central banker
Investors have been talking about a notional Fed put option since at least the October 1987 stock market crash prompted the Alan Greenspan-led central bank to cut interest rates. An actual put option is a financial derivative that gives the holder the right, but not the obligation, to sell the underlying asset at a specified price, called the strike price, which serves as an insurance policy against a market downturn.
“Embedded in this discussion is how much downside do US stocks have [Federal Open Market Committee] Stands ready to defy, in its bid to restore the assumption of future price stability – [Wednesday’s] The official communiqué has lowered the stock level at which investors will look for a Fed pivot,” BMO strategists wrote.
The minutes made it clear that the “proverbial Fed put is officially dead and over,” said Kent Engelke, chief economic strategist at Capitol Securities Management, in a Thursday note.
Stocks had recovered from the 2022 lows set in October before heading into the Fed’s Dec. 13-14 monetary policy meeting, but soon lost traction, losing ground by the end of the month as major indices lost their worst annual performance since 2008. Shares closed higher after Wednesday’s minutes release, then collapsed the next session.
Stocks were higher on Friday, the Dow Jones Industrial Average DJIA, +2.13%, was up around 700 points, or 2.1%, while the S&P 500 SPX, +2.28%, was up 2.3% and the Nasdaq Composite COMP, +2.56%, up 2.6%. The gains led all three major indices to turn positive for the holiday-shortened week, with the Dow and S&P 500 posting weekly gains of 1.5% and the Nasdaq rising 1%.
The rally came after the December jobs report showed an unexpected slowdown in wage growth and the Institute for Supply Management’s services indicator slumped into contraction territory.
Market Watch Live: Stocks stage first major rally of 2023 as investors cheer slowing wage growth
Some market observers wondered how the market reaction, which saw Treasury yields fall and markets increasing odds of a 25 basis point, or a quarter-point rate hike, on Feb. 1 versus a half-point hike, was resonating with Fed policymakers would .
The side jobs report eases pressure on the Fed to hike rates by 50 basis points on Feb 1, but policymakers appear to be growing impatient with market prices at odds with the Fed. Funds rate and the timing of its first rate cut, BNP Paribas economists Carl Riccadonna, Yelena Shulyatyeva and Andrew Schneider said in a statement on Friday.
“This may steer their bias toward a more vigorous response at the next meeting,” they wrote.
See: Financial markets ignore elephants in the room: 223k job gains in December
The minutes showed that no Fed officials expected rates to fall in 2023, underscoring the divide between the central bank and market participants over the likelihood of a move away from tighter monetary policy later this year.
“The minutes clearly underscore the Fed’s focus on inflation, but also its resentment at easing financial market conditions, which it says is hampering its efforts to maintain price stability,” said Ryan Sweet, chief US economist at Oxford Economics, in a note on Wednesday . “Reading the tea leaves, the minutes emphasize that the Fed will reduce inflation at the risk of damaging the job market and the economy at large.”
Ian Shepherdson, chief economist at Pantheon Macroeconomics, said on Wednesday that mention of financial conditions should convey that investors should not expect policymakers to “soften their inflation line until it becomes apparent that a serious shift in data is underway.” .”
See: Goldilocks Scenario? Slower wage increases could help the US economy stave off a recession.