Are Policy-Makers Adding to the Market Volatility?
By Amanda Compton
According to Allianz Economic Advisor Mohamed El-Erian, the answer is a resounding yes, and he didn’t mince words when asked about the reason for the volatility in a recent CNBC Squawk Box interview. In fact, he went so far as to say that this is a two-part policy mistake.
“Part No. 1 was being seduced by ‘transitory’ and doing nothing,” said El-Erian, referring to the term Fed officials used to describe inflation as temporary through much of 2021. “Even in March, they were still buying bonds, just to tell you the magnitude of how far behind they fell. And now in the scramble to catch up, they are hiking aggressively into a strong economy, which will be phase two of the policy mistake.” El-Eiran went on to say that governments and central banks across the globe have become sources of volatility rather than volatility suppressors. “We need policy-makers to stop adding to the problem because that’s what they have been doing," he added.
While this market correction can help wash out distortions in financial markets (that were also a product of Fed policies in the other direction), many are growing suspect of the frequent market swings and the Fed's involvement in this growing trend.
For instance, CNBC's Jeff Cox noted that, at the onset of the Covid pandemic, "the central bank slashed benchmark borrowing rates to near-zero and instituted a series of unprecedented liquidity and lending measures in an effort to stave off the initial crisis but that also one day would have to be unwound." Then there are the recently-passed government spending programs including the Inflation Reduction Act as well as the student loan forgiveness program and the billions being sent to Ukraine.
"Massive government spending combined with an aggressive Fed policy is like vinegar and water - they just don't mix," said FFG Wealth Manager, Jay Fox, CFP®. "Our hope is that, with the cooling housing market, along with other indicators that the economy is slowing, the Fed and policy- makers will rethink their economic approach, change course, and help this market get back on track."
(HERE is what Fox Financial Group is doing to protect and grow client portfolios during this uncertain time.)
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