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Could The Fed End The Stock Rally?


  • The Fed could trigger a recession and a considerable stock market selloff if it tightens too much.
  • We doubt there is much need for that given the fact that inflation is still very well behaved.
  • In fact, in a world plagued by deflationary forces and high debt levels, a little inflation isn't actually much of a problem.

The Fed is on a tightening path but, as some suggest, in the absence of accelerating inflation this could well risk an unnecessary recession and a considerable stock market sell-off, so let us investigate the issue.

In a previous article we noted the more or less synchronized recent upturn in the world economy, which seems to offer a good backdrop for tightening monetary policy.

Indeed, central banks, if they haven't tightened policy already, are certainly making a lot of noise in that direction, which has been blamed on a little 'taper tantrum' on the bond markets, from CNBC:

Since June 26, the U.S. 10- year yield has risen from 2.12 percent to Thursday's high of 2.38 percent. The move has been global, after European Central Bank President Mario Draghi last week pointed to a less risky outlook for the European economy, and Fed officials made consistently hawkish remarks. Some of those officials said they were even concerned that their policies created a too easy financial environment, meaning interest rates should be higher.

In fact, bond yields are likely to be rising on both the synchronized upturn in the global economy and the prospect of monetary tightening. See the upturn in PMI figures basically everywhere:

It should also be noted that the monetary tightening isn't a general phenomenon, and some banks aren't taking the rise in yields lying down, from Business Insider (our emphasis):

In order to prevent a rise in yields of a magnitude seen in other markets, the Bank of Japan (BoJ) went all-in earlier today, pledging to buy an unlimited amount of 10-year bonds at a yield. It also upped its buying of JGBs maturing within 5 to 10-years, increasing its allocation from 450 billion to 500 billion yen. The BOJ, as part of its quantitative and qualitative monetary easing (QQE) with yield

This article was written by

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Finding the next Roku while navigating the high-risk, high reward landscape

I'm a retired academic with three decades of experience in the financial markets.

Providing a marketplace service Shareholdersunite Portfolio

Finding the next Roku while navigating the high-risk, high reward landscape.

Looking to find small companies with multi-bagger potential whilst mitigating the risks through a portfolio approach.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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