For decades, Wall Street has relied on the Federal Reserve's accommodative monetary policy and the "Fed Put," which has led to complacency among investors. However, as Fed Chair Jerome Powell channels Paul Volcker's spirit, investors must recognize the risk of a significant stock market correction. Powell appears bent on pursuing his dual objectives of whipping inflation and ending the Fed Put. Investors should recognize that the days of easy money are over. It may be prudent to position portfolios accordingly. By ignoring Powell's message, Wall Street and the mainstream media are setting the stage for a rude awakening as the Fed prioritizes inflation, long-term credibility and the public interest.
Despite Wall Street's demands for rate cuts, Powell remains unwavering in his determination to whip inflation, regardless of short-term consequences for the stock market. This stance is not merely a response to current economic conditions but also an acknowledgment of the Fed's role in creating the worst wealth gap in history.
Powell understands that bold action is necessary to restore the Fed's credibility. By insisting on ending the Fed Put, he sends a clear message that the Fed will no longer bail out Wall Street at the expense of Main Street.
Economic data consistently indicates that the U.S. economy is booming, providing the Fed with flexibility to maintain a hawkish stance without risking severe recession. Growing populist movements also pressure the Fed to prioritize average Americans over the financial elite.
Sophisticated investors must recognize that the Fed's resolve to whip inflation and kill the Fed Put, combined with a strong economy, creates a perfect storm for a significant stock market correction. As interest rates remain elevated and the Fed refrains from intervening during downturns, investors will be forced to reassess the true value of their holdings.
The stock market's valuations have become disconnected from underlying fundamentals, due to the belief in the Fed Put. As this belief is shattered, a painful repricing of risk assets may be likely. Sophisticated investors who fail to adjust their portfolios may find themselves on the wrong side of this shift in monetary policy.
The information contained in this Higgins Capital communication is provided for information purposes and is not a solicitation or offer to buy or sell any securities or related financial instruments in any jurisdiction. Past performance does not guarantee future results
Keywords:: Higgins Capital, Federal Reserve Chair Jerome Powell's resolute hawkish approach, The termination of the Fed Put and its effect on the stock market, The Fed's contribution to creating the most severe wealth disparity in history, Techniques for sophisticated investors in an evolving monetary policy landscape, The ramifications of Wall Street overlooking the Fed's hawkish position, The necessity for the Fed to rebuild credibility and prioritize Main Street, The influence of populist movements on the Fed's policy decisions, The disparity between stock market valuations and fundamental underlying factors, The probability of a painful risk asset repricing as the Fed Put concludes, The significance of modifying investment portfolios considering the Fed's policy change