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Chart of the week

A challenging tightrope walk for the Fed gets harder

Financial conditions and markets have danced closely together this year. This week’s chart looks at why their latest move may be problematic for the Fed.

December 2, 2022 | 2 minute read

Financial conditions and the S&P 500

Source: Bloomberg Finance, L.P., as of November 30, 2022. The Bloomberg Financial Conditions Index gauges overall conditions in U.S. financial and credit markets; positive values indicate more accommodative financial conditions.

  • Investors largely ignored the meat of Fed Chair Powell’s sober remarks on the challenges the Fed faces as it seeks to lower inflation in his Washington, D.C. speech on Wednesday. Instead, they latched onto Powell’s assertion it may be time to moderate the pace of rate hikes.
  • Markets ripped higher on the day, extending November’s momentum, while financial conditions loosened further.1 Wednesday’s market activity perfectly illustrates the primary challenge facing the Fed today: When to take their foot off the monetary gas pedal without reaccelerating inflation.
  • The chart highlights the tightrope policymakers are currently walking. Despite the Fed engaging in its fastest rate hike cycle in decades, financial conditions have intermittently turned more accommodative throughout the year and stocks have followed suit; the latest such cycle began in mid-October and has been in place since.1
  • Rising markets and easing financial conditions again put policymakers in a conundrum as they remain committed to lowering inflation in a sustained way. They also create the potential for further volatility ahead if the terminal (peak) rate moves higher again or if policymakers’ actions don’t align with market expectations.
  • With this in mind, investors would be wise to remain prepared for further choppiness ahead despite stocks’ recent move higher.

  • Bloomberg Finance, L.P., as of November 30, 2022. The Bloomberg Financial Conditions Index gauges overall conditions in U.S. financial and credit markets; positive values indicate more accommodative financial conditions.

The chart of the week and any accompanying data is for informational purposes only and shall not be considered an investment recommendation or promotion of FS Investments or any FS Investments fund. The chart of the week is subject to change at any time based on market or other conditions, and FS Investments and FS Investment Solutions, LLC disclaim any responsibility to update such market commentary. The chart of the week should not be relied on as investment advice, and because investment decisions for the FS Investments funds are based on numerous factors, may not be relied on as an indication of the investment intent of any FS Investments fund. None of FS Investments, its funds, FS Investment Solutions, LLC or their respective affiliates can be held responsible for any direct or incidental loss incurred as a result of any reliance on the chart of the week or other opinions expressed therein. Any discussion of past performance should not be used as an indicator of future results.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

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