Since the Great Recession, the Fed has transformed itself into an entity more and more responsible for asset prices. This was the stated goal since 2009 as the Fed adopted a new philosophy called the "Wealth Effect." The thinking behind it was simple: growth in asset prices would translate to an increase in consumer spending and hence demand itself. It was a 'trickle down' economic philosophy an increasingly financialized economy.
This backdrop has defined our post-2009 era which stirred certain pathologies that were reflected in the greater culture and politics. It was the time when 'finance became a culture' and actual-productivity plummeted across most developed economies, especially the United States. But somehow in spite of the accumulating dysfunction across most key areas, everything kept trudging along, partly thanks to investors being satiated with record returns.
While the near-zero interest rate regime may now be ending, it is worth considering how much of the water we were all swimming in excused poor state capacity, distorted economic fundamentals, and how it even kept a lid on the dysfunction potentially blowing up in our faces. Now that we have to reckon with these realities, it may be wise to ask how many worldviews were simply products of the the cheap money regime - which is now, in a shock to many, coming to a close. Whether or not it will easily be let go, however, is another matter.
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Notes -
There was comparable excess in the 80s and 90s despite even higher interest rates than now. The greatest asset bubble ever, the late 90s tech boom, was against a backdrop of 5-6% interest rates. High interest rates do not change things much. Yeah, 4% interest rates makes cash more attractive, but this is not going to stop huge tech companies from generating record profits. nor will it stop speculation.
The argument that "interest rates don't matter because counterexamples" ignores that it's very plain and obvious that they do matter right now in the U.S. markets.
A few weeks ago JPow gave a slightly less hawkish speech than normal at Jackson Hole and the Nasdaq rallied 6% in a single day. That is not a normal move. That level of upward move is something that only happens every few years on average, and yet it happened on a relatively mundane speech. More recently, JPM was calling for a move up to 10% depending on if inflation came in high or low (with the implication that this would affect the Fed's decisions on rates). This is not normal.
Right now, the U.S. market is moved primarily by interest rate expectations. It's all a punt on whether the free money will come back again.
In case anyone is still following along, the Nasdaq is down 2.5% today because of strong economic data. Why? Because the strong data means a higher chance of the Fed raising rates.
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Why isn’t it normal?
First the moves are outsides because of all the algos and vol targeting type funds out there. Their the main cause of excessive scale.
Why shouldn’t real economic data line inflation rates have significant effects on stocks prices?
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