January 23, 2022

Investors fear Fed action will trigger a stock market bubble

Stock Market Crash 2020, Turning Crisis into Opportunity

Investors fear Fed action will trigger a stock market bubbleInvestors fear Fed action will trigger a stock market bubble

Federal Reserve Chairman Jerome Powell has made it abundantly clear that he is more concerned with the difficult situation in the labor market than the possibility that additional stimulus could eventually lead to higher inflation. This view is shared by his former colleague Janet Yellen..

«Powell talked a lot about the job market and how his healing must include all Americans who want to work. It is possible that the Fed will allow inflation to rise by several points», – said Quincy Crosby, Chief Market Strategist, Prudential Financial.

Inflation is not a concern at this time. Consumer prices have risen less than 2% in the past 12 months, according to Fed indicators that look at personal consumer spending.

Interest rates won’t change anytime soon either. According to the latest economic forecasts of the regulator, they will remain at the current level for several more years.

However, some are concerned that this could lead to the formation of bubbles in a number of sectors.. Stock markets are nearing new highs and the housing market is overflowing.

This is partly due to the Fed’s friendly monetary policy and the hope for additional stimulus from the administration. Joe Biden.

«Official figures do not show inflation that people see in their daily lives.», – said Patrick Leary, Chief Market Strategist and Senior Trader at Incapital.

«Most Americans spend a lot of money on housing, food, education, and health care. It all goes up in value. It doesn’t strike me as deflationary», – he added.

Crosby is also concerned that the Fed continues to intervene to make sure interest rates don’t creep higher to keep the Wall Street buzz going.

10 year treasury bonds, showing one percent income in the past few weeks, a potential sign that the economy is warming up. But buying Fed bonds helped keep rates from rising significantly. In the end, it can turn into trouble, experts say.

«Investors need the bond market to function properly. What if inflation really starts to creep up? Will the Fed be ready for this?», – stresses Crosby.

This concern is fueling fears that the stock market continues to rally only to plummet once the Fed and Janet Yellen will start to signal that the economy is strong enough to dispense with incentives.

Similar stories have already happened. Wall Street suffered a shock in 2013 when Fed Chairman Ben Bernanke began scrapping the Great Recession-era bond buying program, which was also introduced to keep interest rates low and boost the economy..

The hope this time is that Jerome Powell has learned from the past and some experts predict that he will not do anything rash or radical.

«We continue to believe that the Fed, like all other developed market central banks, is very reasonable. To avoid problems, Powell hinted that the change in the pace of asset purchases will be covered in a timely manner.», – the economist said in his report Marvin Loch.

Others argue that it is unwise to bet against current market momentum. As long as the Fed and Treasury Department are in favor of more stimulus, the natural direction for stocks is to continue to rally.. 

«Professionals and everyone else probably understands that this market is partially out of touch with reality.. This leads to strange dynamics. We can conclude that the market will remain irrational longer than you can remain solvent.», – said Sebastien Gali, macroeconomic strategist Nordea Asset Management

But things may not be so easy. The big problem is that as stocks rise, inflationary pressures will rise as people feel more confident in the economy..

Ultimately, the Fed may be forced to act faster than it would like to cool the situation..