The Federal Reserve’s hawkish policy tilt last week in the face of falling inflation and tame wage growth caught investors by surprise. Now the chief strategist at Bank of America and others on Wall Street are speculating that there’s an ulterior motive: surging stock prices.
XAutoplay: On | Off BofA’s David Woo, who sees a range of data pointing to a loss of economic momentum, wondered in a research note why the Fed statement and outlook seemed to reflect a much different reality. “Can it be the case that its hawkishness was prompted by something other than its reading of the economy?”
Woo postulates that “the Fed has become concerned about the recent surge in the equity market, especially tech stocks, that has been feeding off low interest rates and low volatility.”
On Monday, tech investors seemed little concerned that high-priced stocks may be in the Fed’s sights. Facebook (FB) rose 1.2%, Apple (AAPL) 2.5%, Google-parent Alphabet (GOOGL) 1.75%, Netflix (NFLX) 0.5% and Amazon (AMZN) 0.8% on the stock market today.
IBD’S TAKE: Stocks started the week on a solid note, but overall the uptrend remained under pressure, as it has since big tech leaders swooned on June 9. That’s a signal to exercise extra caution about buying stocks, cut losses quickly and take some profits to raise cash. Make sure to read IBD’s The Big Picture each day to get the latest on the market trend.
Facebook, Alphabet and Amazon rebounded in bullish fashion from their 50-day moving averages last week, while Apple is still below that key level. Netflix moved above its 50-day intraday Monday, but pulled back in afternoon action.
Eric Peters, chief investment officer at One River Asset Management, also puzzled over the Fed getting hawkish “when they see no inflation.”
“There’s no red on the screens anywhere. All they ever see is green. Day after day. It’s time to subdue Wall Street,” said Peters’ letter to shareholders.
Yet Deutsche Bank economists take the Fed’s avowed inflation concerns seriously, agreeing that there is a realistic possibility that the jobless rate, now at 4.3%, will sink well below 4% by the end of 2018, likely fueling “a substantial increase in wage and price pressures.”
The Fed’s next move is expected to be a shift in its reinvestment policy, letting its portfolio shrink by up to $10 billion worth of mortgage and Treasury bonds each month, rather than continuing to reinvest principal as bonds mature.
That will be a modest reversal of the Fed’s quantitative easing, which was credited with inflating asset values in the wake of the financial crisis.
“The sudden shift in focus on the balance sheet” could, in part, reflect “possible concern about the rise (in) asset prices,” wrote Jefferies economists Ward McCarthy and Thomas Simons after the release of the Fed’s March meeting minutes telegraphed a likely change in reinvestment policy before the end of 2017.
In its May meeting minutes, the Fed noted that “asset valuation pressures in some markets were notable,” though overall financial system vulnerabilities were “moderate.” Minutes of last week’s Fed meeting, to be released on July 5, could update that language.
After last week’s meeting, there is a big disconnect between the Fed’s own policy outlook — with members expecting four quarter-point rate hikes by the end of 2018 — and Wall Street’s expectation for just one hike through June 2018, according to the CME Group FedWatch tool.
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