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The Fed's Aggressive Tapering Poses Risks For Market Stability

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EDITOR'S NOTE: Morgan Stanley is joining Goldman Sachs in sounding the alarm for U.S. markets at the beginning of 2022. With the prospect of turbo tapering on the way and multiple rate hikes now expected next year, Morgan Stanley Chief Investment Officer Michael Wilson recently warned, “the Fed's pivot to a more aggressive tapering schedule poses a larger risk for asset prices than most investors believe.” When the Fed last tapered like this in 2014, the results weren’t catastrophic, but Wilson gives three reasons why this time could be different. The CIO notes that this time, “the Fed is exiting QE twice as fast this time, asset prices are much richer today, and
growth is decelerating rather than accelerating.” Wilson also believes “valuations for US equity markets were likely to come down over the next 3-6 months,” and lists three scenarios as to how this could all play out. There’s the “Goldilocks” scenario where this all more or less goes away and we’re all OK, which Wilson pegs at a 20% chance. There’s the “Supply picks up just as demand fades” scenario, which is the bank’s “bear scenario,” which is also at 20%. And, there’s a 60% possibility that “Inflation remains hot and the Fed responds more aggressively.” This leads to continued inflation and more bad times in 2022. 

Until last week, the economic and market views of Goldman Sachs and Morgan Stanley couldn't be more opposite: the former, delightfully optimistic, expects the US economy to grow on all cylinders in 2022 and despite the Fed's tightening - two months ago Goldman flipped its Fed views by pulling forward its first rate hike forecast by one year to July, and followed it up over the weekend by predicting that liftoff will begin in May with two more rate hikes to follow in 2022...

Photo: Zero Hedge

... said in its year-ahead market forecast last month that it expects the S&P to hit 5,100 by the end of 2022 even as the economy slows down modestly from its current feverish pace.

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