US President-elect Biden’s financial team is gradually taking shape. CNN reported that Fed Chairman Bauer and Yellen, who is expected to become Treasury Secretary, have joined forces. Both are concerned about the recovery of the job market and support the stimulation of the severely hit by the epidemic. Economy, should investors worry about further gains in U.S. stocks, which remain high?
The capital feast has created a boom in the stock market. The recent surge in US stocks is mainly due to the Fed’s ultra-loose monetary policy and investors’ expectation of more fiscal stimulus after the Biden administration takes office.
Bauer has repeatedly stated clearly that he is more concerned about the job market than stimulating inflation, which is consistent with Yellen’s view. Quincy Krosby, chief market strategist at Prudential, said that Bauer is talking about the labor market, and recovery means that all people who want to work have found a job, and Yellen himself is a labor economics scholar, which means the Fed may be too dovish. Lead to increased inflation.
Is the super loose environment causing inflation to rise?
The current lack of inflation in the United States has caused doubts. The price index favored by the Fed has risen by less than 2% in the past 12 months. According to the interest rate dot chart released on Wednesday, the Fed will maintain interest rates at nearly zero at least until the end of 2023. level. However, for the local residents, the costs of housing, catering, education, and medical care are rising, and there is a gap between actual feelings and official data.
The stock market with record highs and the hot housing market have made some people worry that the bubble may gradually take shape.
The bond market shows that the economy is heating up. The 10-year U.S. Treasury yield has been maintained at close to 1% for several weeks. The Fed’s bond purchase plan should prevent interest rates from rising sharply, but Krosby asked: “In case of inflation. Is starting to climb, what will the Fed do?”
Recurring panic reduction in 2013?
The market is now worried that the stock market will continue to rise until the day when the Fed and Yellen say that the economy is so strong that it does not need to be supported by stimulus, it will fall sharply, just like the Fed Chairman Ben Bernanke in 2013 began to reduce debt and quantitative easing ( QE), the history of “taper tantrum” (taper tantrum) that caused the stock market to plummet.
Some analysts said that with the lessons of the predecessors, when Bauer decides to leave, he will not do too much too quickly. Bauer once said that if the day comes to adjust the pace of debt purchases, he will communicate well with the market.
The S&P 500 index has soared 65% from its low in March, and the P/E ratio of more than 22 times is much higher than the 10-year average, while the 10-year US Treasury yield is still at a historical low of 0.92%. Bauer said at a press conference after the meeting on Wednesday that he was not worried about the overvaluation of U.S. stocks. The reason was that considering that the yield rate was still below historical levels, the stock premium was the return from taking stock risks.
It’s not wise to fight the Fed
Some people argue that it is not wise to act against the Fed. As long as the Fed and the Ministry of Finance support the stimulus of the economy, the stock market will naturally rise, which means that market irrationality will continue for some time.
The most worrying thing is that as long as the stock market continues to rise and people’s confidence in the economy increases, inflationary pressures will increase. In the end the Fed was forced to act faster than they expected to cool the situation.
Patrick Leary, chief market strategist at Incapital, said: “If consumers are still willing to pay after the prices of goods and services rise, why bother to lower prices? The Fed can tolerate a slow rise in inflation, but it cannot accept an explosive rise in inflation.”
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