On Wednesday of this week, President Biden publicly charged the Federal Reserve to rein in inflation. “Given the strength in the economy, and the pace of recent price increases, it’s appropriate,” as Fed Chair Jerome Powell has indicated, “to recalibrate the support that is now necessary.” That call to action alone was reason enough for markets to sell off for the week.
“Recalibrating support” means raising interest rates to tighten financial conditions and ending the bond buying programs commonly known as Quantitative Easing (QE). This will mean the end of the ultra-stimulative level of monetary policy the Fed has intentionally maintained since the onset of the Covid pandemic.
Biden’s press conference brings to light an unpleasant reality for policymakers—one that has been building since the Fed itself first signaled such actions last fall—to stem inflation, markets must do without the support of easy money.
So, does Jerome Powell follow through as instructed by President Biden and raise rates to curtail inflation, even if such actions risk tanking the stock market? As indicated in the chart below produced by 3Fourteen Research, 71% of past Fed rate hikes have come when the S&P 500 is within 6% of 1-year highs. As of today, the S&P 500 is almost 9% below its 1-year high—and we haven’t seen the first rate hike yet.