Fed will need to push bond yields higher and stock prices lower.
Fed Chair Jerome Powell “Policy works through financial conditions. That’s how it reaches the real economy.”
He’s right. In contrast to many other countries, the U.S. economy doesn’t respond directly to the level of short-term interest rates.
Most home borrowers aren’t affected, because they have long-term, fixed-rate mortgages.
And, again in contrast to many other countries, many U.S. households do hold a significant amount of their wealth in equities. As a result, they’re sensitive to financial conditions: Equity prices influence how wealthy they feel, and how willing they are to spend rather than save.
The S&P 500 index is down only about 4% from its peak in early January, and still up a lot from its pre-pandemic level.
Similarly, the yield on the 10-year Treasury note stands at 2.5%, up just 0.75 percentage point from a year ago and still way below the inflation rate.
Bill Dudley Bloomberg 6 april 2022
He served as president of the Federal Reserve Bank of New York from 2009 to 2018, and as vice chairman of the Federal Open Market Committee. He was previously chief U.S. economist at Goldman Sachs.
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