Market attention this week was drawn by Janet Yellen when she hinted at possible interest rate hikes, only to be denied by the chorus of the FOMC speakers. Meanwhile a more interesting document was released on Thursday.
The Fed releases Financial Stability Report with a semi-annual frequency. This document is often overlooked by the markets as it’s been the case this time. Yet there some very interesting comments. Lael Brainard from the FOMC (who is by the way sometimes mentioned as a possible candidate for the top office at the Fed when Powell’s tenure ends next year) took no prisoners as she said that stretched valuations and buoyant sentiment may result in a painful repricing event.
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The Fed warns about the risks they created… Source: Bloomberg
All the right comments, one would say, except the very reason for those risk is – the Fed itself. As we know the whole “pandemic” rally wouldn’t be nearly as impressive without an unprecedented amount of QE. What is more, the economy is already running hot with inflation pressures emerging and the Fed could easily deflate risk taking if they wanted by at least suggesting the QE taper. Looking at how markets reacted to Yellen comments, it’s easy to understand why the Fed is so afraid to move on and they’ll stay hesitant unless forced by rising inflation. This sets the scene for the US April CPI which we will get next Wednesday.
Markets ignore warnings from the Fed and could do so for as long as the central bank delays taper discussion. US30 sets record after record and is up over 30% since the end of October 2020. Source: XTB Trading Platform
