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‘Fed Put’ in Doubt as Inflation Runs Hot, But Low Yields Will Keep Stocks in Play

Stock MarketsDec 03, 2021 05:50PM ET
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© Reuters.

By Yasin Ebrahim

Investing.com – Rampant inflation threatens to destroy the ‘Fed put’ as the Federal Reserve will be forced to tighten even if the Omicron variant weighs on growth, but the dearth of alternative attractive investments will keep stocks in vogue.    

“By severely limiting the FOMC's ability to respond to downside risks posed by Omicron, inflation has effectively destroyed the Fed put,” Jefferies (NYSE:JEF) said, referring to the belief that when markets decline significantly, the fed will step in with accommodative policies.

But even as inflation will force the Fed’s hand to tighten, and limit the central bank’s ability to respond to market downturns, the hunt for yield will continue to land at the door of stock markets as returns on offer from U.S. government bonds aren't likely to attract investment dollars anytime soon.

"[I]nvestors will have to find ways to get a return and one and a half percent [on the 10-year Treasury yield] on your money is not going to cut it,” Eric Diton, president and managing director of the Wealth Alliance, told Investing.com in an interview earlier this week. 

“That’s really one of the main reasons why we remain bullish on global equities because I don't think that we're going to see the 10-year Treasury yield at three or four percent anytime soon, global rates still going to continue to remain low.”

For months and months, Powell has held onto his view that the factors driving up inflation had been transitory.

But that all changed this week after the Fed chief conceded that the central bank had underestimated how long elevated inflation would persist, and suggested that a faster pace of tapering was on the agenda for the December meeting to help keep price pressure in check.

"The economy is very strong and inflationary pressures are high, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases, which we actually announced at the November meeting, perhaps a few months sooner,” Powell said in testimony before the Senate Banking Committee this week.

The remarks took some by surprise as they arrived after Powell had flagged downside economic risks posed by the Omicron variant of Covid-19.

Still, the threat of the new variant isn’t likely to derail the economic recovery even as the ‘Fed put’ appears on the brink as the consumer is strong enough to plug the gap somewhat.

“We're still very much in the midst of a global economic recovery, even though this variant may make it uneven, it’s not going to derail this global recovery,” Diton said.

“The consumer accounts for 70% of GDP, and they're in very good financial shape,” Diton added. “There could very well be a decent correction 10% to 20% in stocks,  but that would be a buying opportunity.”

‘Fed Put’ in Doubt as Inflation Runs Hot, But Low Yields Will Keep Stocks in Play
 

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Comments (14)
Ama Tobo
Ama Tobo Dec 06, 2021 3:22AM ET
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Tapering Soon or Sooner.
Benoit Avril
Benoit Avril Dec 05, 2021 3:14AM ET
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That's a very dubious analysis, I would even say misleading analysis. First higher rates impacts everything, it's not only the return that will be affected, it's the price of money, the price of premiums, the price of shorts.And as the prices are so high, the risk is too. So you could see a major pullback because funds fear there could be a pullback.
Benoit Avril
Benoit Avril Dec 05, 2021 3:14AM ET
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Plus, higher rates means lower inflation which less erope the massive sleeping money people made during their investment.
Truthful Insights
Truthful Insights Dec 05, 2021 12:44AM ET
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Fed cannot raise interest rate. Govt with 30tn debt plus state govt debt will mean additional interest of 1 tn. Fed in catch 22. if they raise interest rate then more fed buying of bonds or if they maintain 0% then inflation keeps rising. either you have inflation over medium term or now. So it is better to maintain 0% or infact cut interest rate as yields will fall and less govt borrowing. So lesser the interest rate means tapering by reduced govt borrowing because govt share of gdp is increasing. Also supply will increase to reduce prices especially agri, but service inflation will continue
anumi Mani
anumi Mani Dec 04, 2021 1:55PM ET
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When everyone says 10% drop, 1st it may not happen & second if it does happen, it would be bot hand over fist. Eco is good , not seeing why mkt could drop with miniscule rate hikes later half of FY'22.
Linh Linh
Linh Linh Dec 03, 2021 10:47PM ET
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Lay me down so slowly, pls
William Bailey
William Bailey Dec 03, 2021 10:21PM ET
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Panic will rule the day!!
peter neal
peter neal Dec 03, 2021 9:37PM ET
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Buy Gold and wait for the Great Reset.
Todd Gray
Todd Gray Dec 03, 2021 8:20PM ET
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Yea. But, who wouldn't want the same dividend buying shares at a 50% discount?
Karl Kessler
Karl Kessler Dec 03, 2021 7:40PM ET
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Belt tightening is coming, to be sure. Peace to all.
Rob Banks
Rob Banks Dec 03, 2021 7:28PM ET
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crazy how the Fed IS the economy now and it's been totally normalized via mass gambling in the stock market. it's been going on forever bi doubt, but now more and more want a piece of the get rich for doing nothing pie that wall street was keeping to itself forever. America is in BIG doodoo
michel bovy
michel bovy Dec 03, 2021 7:11PM ET
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Central Banks are... promoting Ponzi Scheme
Poay Keong Lim
Poay Keong Lim Dec 03, 2021 6:48PM ET
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Quit using covid as excuse to try to stop do the right thing, wallstreet like low rate to keep prop the market, but american is suffering inflation everyday, who is more importsnt to Fed?
By designe
Bydesigne Dec 03, 2021 6:48PM ET
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That's capitalism baby.
Avi Karpel
Avi Karpel Dec 03, 2021 6:33PM ET
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The market was in a bubble for quite sometime, only greed moved it. Omicron is just the needles ro burst it
Richard Saunders
Richard Saunders Dec 03, 2021 6:30PM ET
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Last paragraph of the article:“The consumer accounts for 70% of GDP, and they're in very good financial shape,”LOL!!!!! You have GOT to be kidding me.
Nickquick Nickquick
BorgataAa Dec 03, 2021 6:30PM ET
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I just love the lies the feed us and expect us to believe. They really do think the people are stupid. Its amazing
William Bailey
William Bailey Dec 03, 2021 6:30PM ET
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Yep!! Gdp is dead
 
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