2022 has been a brutal year for the stock market. YTD, the S&P 500 is down more than 22%. And, there doesn’t seem to be a catalyst to turn things around given that the economy is slowing, and the Fed is embarking on its most aggressive hiking campaign in decades. If inflation was mild, rising credit spreads and plunging asset prices would likely cause the Fed to take notice. However, in this circumstance, this is not the case. In some respects, the Fed’s tightening is having its desired effect as financial assets are the main channel showing the efficacy of policy.
In the same way, it could be argued in 2020 that if asset prices weren’t rising, then the Fed wasn’t doing enough to support the economy. It can be argued that if markers of financial and economic stress are not increasing, then the Fed is not fully engaged in the battle against inflation. Regardless of the theory, it’s clear that until inflation starts to moderate, this policy path will continue.
