The Fed is currently becoming more hawkish as people are wary about its policy and justification to battle inflation. As financial policy makers, the Fed believes that their decisions about interest rates and fiscal matters determine the fates of stocks, bonds, and currencies. But, so far, they have just done few actions on tightening the policy and the red tape only.
As a result, the positive developments in bond and stock markets means more tightening policies in monetary authorities. On the other hand, the easier condition in debt and equity markets rebound requires harsher central bank actions. In this situation, investors could view bear market rallies as harbingers of more tightening down the road, said Barron.
One, short-term interest rates and purchasing and two, selling securities are the Fed’s main policy tools. This is through the money and government securities market. Thus, it would indirectly affect the broader rates as well as securities prices. The central bank officials monitor the action in a broad range of financial arenas. This includes the corporate credit, mortgage, currency, as well as equity markets. This is the core workflow where investment occurs. Therefore, it affects the overall economy.
Meanwhile, the red tape has tightened severely or more than it should be.
The actions, on the other hand, have consisted only in two increases in its federal fund target. The target is from 0.75% or near zero, to 1%. It is a low absolute and a record-low real rate, especially when the consumer rate hikes over 8%. The Fed leaders have announced their urge in normalizing the policy stance. But this is not enough to point half increases in the fund rates.
Policy tightening continues to increase such as the withdrawal of liquidity with the reduction of the Fed’s securities holdings starting in June. Measures in the Chicago Fed’s National Financial Conditions Index follow the tightening as well.
