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:) 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 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.”