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That Wasn’t A Selloff
Don't call it a selloff. Seriously. Do yourself a favor.
Earlier this week, a lot of intelligent people (and even more not-so-intelligent ones) suggested Jerome Powell should convene an emergency Fed meeting on the way to delivering an inter-meeting rate cut.
The rationale for such calls went as follows. The Fed should've cut at the July FOMC meeting in order to preempt additional softening in the US labor market and help prepare the runway for a soft landing. Subsequent data (jobless claims
I had a conversation with a well-known economist who is on the talking head circuit on Monday. I am generally dovish on monetary policy and more so today, since I think real rates are very elevated. He is not nearly as dovish as I am. I told him the Fed should cut rates intermeeting only if the credit markets froze. Monday corporate borrowers postponed deals, but had not reached a level of frozen, at least not yet from what I could see. I did tell him in my view, that the FOMC was late and should be looking to cut 50 bps in September, and that Powell would be smart to allude to the end of QT at Jackson Hole, to help signal to the market and help liquidity. The stock market going down 5-10% should have little impact on monetary policy- and it is not a fed mandate, but a failure of the market to allow credit worthy borrowers to obtain credit is a completely different story. Incidentally we do have a market problem in providing small business borrowers and retail clients access to credit at a reasonable price. The basis between these borrowers and US Treasury bonds is too wide. This will eventually bite and the FOMC should head this off- which is why my view is the FOMC should cut rates 50 at the next meeting.
I wrote my comment before reading yours but you’re completely right. The Fed might come to the rescue of credit markets as financial instability can occur if companies can’t refi, but they definitely should not be coming to the rescue of equity markets.
Calls for an emergency cut don’t just seem laughable now, they were laughable on Monday as well.
The S&P500 wiped out three months of gains after multiple years of almost one way traffic – cry me a river.
Credit was orderly and there were clear market structure reasons behind the move (stretched JPY carry trades, stretched equity allocations at vol targeting AMs etc).
We know the Fed will step in on signs of REAL stress, we don’t have free markets, but lets keep some semblance of them and not come to the rescue of every investor that truly believes “stonks only go up”, whether retail or institutional. Supposedly serious/intelligent voices who called for such a move should be ashamed of themselves.