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.