Fed Chair Kevin Warsh Testified to Congress That the Fed Has "Only a Target, and It's 2%," Rejecting Any Soft Inflation Goal. What Does That Mean for Rate-Sensitive Stocks?
Yahoo Finance ·
The Federal Reserve's purpose is two-fold. On the one hand, it attempts to keep goods prices stable, which effectively means keeping inflation in check. On the other hand, it attempts to maintain full employment. These two goals can be at odds at times, as strong growth boosts employment but can lead to higher inflation. That said, since the turn of the century, the Fed has provided the market with the so-called "Fed put." New Fed chairman Kevin Warsh is quickly making good on his promise to end the Fed put, with material short-term and long-term implications for rate-sensitive stocks. The 2% inflation target the Fed is proposing is deliberately limited. No longer is the Fed offering guidance. And there aren't any hints being provided about where things might go next, which might be gleaned if there were a soft target. At this point, Kevin Warsh has taken away the training wheels, forcing investors to figure things out on their own. Notably, bond yields have been rising without any intervention from the Federal Reserve, driven by investor action. That's how things used to work until the dot-com crash in 2000. At the turn of the century, the Federal Reserve started providing guidance to a highly turbulent market. It expanded its guidance during the Great Recession, when there were legitimate concerns that the financial system was collapsing. The guidance provided led investors to believe that the Fed would step in to save the market if trouble arose. That was the so-called Fed put, even though there is no official statement about such a thing existing. The negative consequence of the Fed put was that investors and companies began to rely on it, leading them to take on additional risk. With the put clearly gone, uncertainty has risen dramatically.
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