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Forward Guidance
Why Fed Chair Powell is NOT Coming To Rescue Stocks | Alfonso Peccatiello
May 16, 2022
51:13
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Quick takeaways
- The Federal Reserve's goal of tightening financial conditions has caused a sell-off in both stocks and bonds due to their unusual correlation.
- The Fed's primary concern has shifted to inflation, and they will only ease monetary policy when inflation slows down to desired levels.
Deep dives
Stock sell-off due to unusual correlation with bond sell-off
One of the main reasons for the recent stock sell-off is the unusual correlation between stocks and bonds. Normally, bonds act as a hedge when stocks sell off, but both asset classes have been selling off simultaneously. This is due to the Federal Reserve's goal of tightening financial conditions, which requires bonds to sell off along with other components of the financial condition index, such as credit spreads, nominal and real interest rates, and the trade-weighted dollar. This correlation, which is a departure from the inverse correlation seen in the past, has resulted in a sell-off in both stocks and bonds.
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