Return of the “Fed Put” Increases Fragility Risks

At a recent event in Jackson Hole, Wyoming, Federal Reserve Chair Jerome Powell indicated that inflation, which had been a major concern prompting a series of interest rate hikes, appears to be under control.

As a result, traders are anticipating that during the Fed’s upcoming meeting this month, Powell may shift the focus of monetary policy from addressing inflation to safeguarding the labor market.

Analysts at Bank of America suggested that the Fed might signal its willingness to lower interest rates to support the economy and prevent job losses, a strategy often referred to as a “Fed put.” However, they cautioned that this situation presents “fragility risks and major challenges” for active investors.

They highlighted an early August drop in stock prices due to a disappointing nonfarm payrolls report as evidence that market conditions remain volatile, and that unpredictable liquidity should be a significant concern for investors. The latest monthly jobs report is expected to be released soon, potentially influencing the Fed’s decisions regarding rate cuts.

Additionally, the analysts remarked that despite the “challenging” immediate risks, the combination of enthusiasm for artificial intelligence and a more accommodating Fed stance suggests possible outcomes including increased buying during market dips, risks of asset bubbles, extreme market positioning, and potential positive surprises for stocks in the longer term.