Bloomberg/John Authers/5-20-2022
“It’s very unlikely that the Fed will blink this time.… It needs share prices to fall enough to influence behavior, which means that policymakers need this to turn into a true bear market, and not like one of the 20%-ish declines that were followed by rescues and resumed exuberance. It needs to avoid disorderly conditions that could create systemic problems, and a serious crash that would drive a recession.”
USAGOLD note: The difficulty comes in controlling a panic once it begins, particularly if the Fed’s stated intention is to stand aside. Authers cites the comment from Kansas City Fed President Esther George: “I think what we are looking for is the transmission of our policy through markets understanding, and that tightening should be expected. It is one of the avenues through which tighter financial conditions will emerge.” If that is the consensus view at the Fed, it might end up with more than it bargained for. Wall Street’s memory is notoriously short, but some will remember that the Fed’s tightening into a slowdown in the late 1920s instigated the crash of 1929 and the subsequent full-scale depression.
