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According to Goldman Sachs, unless the Federal Reserve decides to reverse course on strict monetary policy, the chances of the current recession in the market will not end. This would be unlikely, the firm argues, unless the economy is either in recession or is showing signs that the Fed no longer needs to hit the brakes. “This year’s story has been Fed-driven, as markets continue to price in more Fed tightening this year,” said Goldman strategist Vicki Chang, as well as concerns that this front-loaded tightening will turn upside down. ” Note to customers. “Using history as a guide, for equities to come out of their recent lows (and halt the decline), such monetary-tightening-induced contraction is most likely to end. When the Fed itself shifts.” There is no longer any indication that the Fed intends to change course from policy aimed at controlling rising prices to levels not seen in more than 40 years. The central bank has already raised benchmark interest rates twice this year and is expected to approve another series of hikes until inflation comes close to its long-run target of 2%. Atlanta Fed Chairman Rafael Bostick suggested Monday that the rate-setting Federal Open Market Committee could “pause” as early as September to see what effect the rate hike is having, but it was a failure of consensus. approach is not. The bearish phase in the market is in its early stages. The tech-focused Nasdaq Composite Index has entered a bear market, while the S&P 500 and Dow Jones Industrial Average are also hovering around that area. According to the Goldman analysis, investors are looking for a surrender point that may not come for a while. “On average, monetary-policy-driven equity correction has bottomed out when the Fed has shifted toward easing, even if activity has worsened,” Chang wrote. “In short, when the source of the correction is known as monetary tightness, a change in monetary easing has provided fairly immediate relief as the market anticipates and believes that activity will be below the pickup line.” This Fed-driven market downturn differs from retreats that result from a slowdown in business activity. Goldman examined 17 similar episodes from 1956 onwards and concluded that there are differences between the two triggers. In a market slide driven by a decline in manufacturing, Fed policy doesn’t have as much impact. But when markets are responding to a tight Fed, it generally takes at least one indication that loosening policy is on the way until the market hits a trough that leads to a turnaround. “Markets are unlikely to get a clear signal from the Fed until there are clear signs of slowing growth and easing inflationary pressures,” Chang said. “Now there are some indications of each, but neither is certain yet.” Economists at Goldman see a 1-in-3 chance for a recession in 2023. However, Chang said that if inflation shows signs of moderating in the latter part of this year, it could be enough to anticipate Fed policy easing. Provide relief for stocks.
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Credit: www.cnbc.com /
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