No, "The Market" Isn't Worried About "The Fed"

Falling stock prices have recently been in the news. You see headlines about stock investors being worried about “the Fed”. But when you read the actual articles there is often little or no discussion of how Fed policy might be depressing stock prices. More often, the claim is that markets are worried about rising interest rates.

I have two problems with this sort of claim. First, there’s actually no reliable correlation between interest rates and stock prices. Interest rates generally fall sharply during recessions, and yet stocks often do poorly.

More importantly, interest rates are not monetary policy. To suggest they are is to “reason from a price change”. There are occasions when a much tighter monetary policy will be associated with higher interest rates, but this doesn’t seem to be one of them. The 5-year TIPS spread has fallen a bit, but remains well above the Fed’s target. Money is certainly not tightening in any dramatic fashion. Indeed, it should probably be even tighter.

I have no idea why market interest rates have recently crept up a bit (albeit remaining at extremely low levels). Perhaps it is due to fear of an overheating economy. But expectations of tighter money is not the primary factor.

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