All articles tagged with #asset prices
The Federal Reserve's recent rate cut has fueled a broad-based risk rally across assets, reminiscent of 2021, with global equities reaching record highs and credit spreads tightening, driven by optimism about economic growth, AI, and a resilient consumer, though some caution remains about potential inflation and overvaluation.
Falling Treasury yields have led to a rebound in stocks and lifted U.S. government bonds, but some investors are concerned that further declines in yields could keep the Federal Reserve in a hawkish stance for longer, potentially hurting asset prices. The relationship between yields and financial conditions has come into focus, with falling yields easing financial conditions. However, if yields continue to fall, financial conditions could become too loose, forcing the Fed to keep rates higher for longer to prevent inflation from rebounding. Some Fed officials have suggested that rising yields could substitute for further rate hikes. Analysts believe that further easing in Treasury yields could be a "double-edged sword," leading to a more hawkish stance by the Fed.
Allianz chief economist Ludovic Subran has warned investors to prepare for months of market readjustments, as the threat of a new "financial accident" looms. He referred to economist Hyman Minsky's description of a precipitous drop in asset prices after a build-up of debt, stating that "we have all the ingredients of a so-called Minsky moment." Subran noted that liquidity pools or liquidity crunches are starting to be visible everywhere.
Marc Rowan, CEO of Apollo Management, believes that the current economic downturn is a "non-recession recession" that is affecting asset holders more than the general population. While the Federal Reserve's interest rate hikes have caused a decline in asset prices, the labor market has remained strong, benefiting low-income households. However, the wealth gap is unlikely to close anytime soon due to the significant head start that higher-income households have in terms of asset ownership.
The Federal Reserve's mandate should be updated to include an explicit objective of financial market stability, as monetary policy cannot be separated from financial stability. The Fed's current inflation target of 2% a year takes no account of asset prices, leaving the stability of financial markets to regulation and supervisors. However, even the best regulatory regime will not be able to keep up with financial innovation, and will need support from monetary policy. Having financial stability as part of the Fed's formal mandate would force explicit recognition of the issue and help forestall additional crises.
Some voices are calling for the Fed to abandon its 2% inflation target and accept 4%-5% core PCE inflation as the new normal. However, if the Fed were to do so, short-term rates would stay high, long-term yields would explode, and mortgage rates would blow out, leading to lower asset prices. The entire market psychology is based on the hope that inflation will be back at 2% by the end of this year or no later than the end of next year, and if the Fed were to abandon its fight with inflation, it would be a rude awakening for markets betting on 2% inflation.