Stock market is crashing, causing jitters across Wall Street. The Fed is reacting to the glim market outlook with a push for stimulus.
The U.S. stock market is crashing, and it is causing jitters across Wall Street. The Federal Reserve is finally reacting to the glim market outlook with a push for stimulus.
According to the Financial Times, Fed chair Jerome Powell plans to tell Congress stimulus is necessary for small businesses.
The new stimulus proposal has been at a stalemate as the Republicans and Democrats struggle to agree on a number.
The absence of new stimulus has led investor confidence in the stock market to drop noticeably. On September 21, the Dow Jones Industrial Average (DJIA) plunged by over 800 points in a violent sell-off.
On September 10, the Democrats rejected the “slimmed-down” stimulus bill, which did not include direct stimulus checks to individuals.
The two parties have since failed to reach a consensus on stimulus, despite U.S. President Donald Trump’s encouragement.
There are hopes that Powell’s speech could push Congress to reach for a stimulus deal in the near term. If so, the increasing likelihood of new stimulus could rejuvenate the sentiment around the stock market.
In a written speech, Powell said that loans from the central bank have limitations in helping small to medium-size businesses. Emphasizing the importance of direct fiscal support, Powell stated:
“Many borrowers will benefit from these programs, as will the overall economy, but for others, a loan that could be difficult to repay might not be the answer. In these cases, direct fiscal support may be needed.”
The U.S. stock market desperately needs a multi-trillion dollar stimulus package for three critical reasons.
First, direct checks are needed to buoy consumer confidence, which has been declining in recent months.
Second, loans to small businesses are critical to ensure a cascade of bankruptcies does not cause a newfound economic slump.
Third, a sizable stimulus bill to alleviate the pressure on the U.S. dollar is critical to relax the stock market.
Historically, a weakening reserve currency has coincided with an underperforming stock market. For that reason, many investment firms are optimistic about Chinese and Japanese stocks in the medium term.
According to IG strategist Jingyi Pan, investors do not have many choices apart from waiting for fiscal stimulus.
Initially, analysts expected the stock market to tread while waiting for new stimulus cautiously.
But the abrupt sell-off of equities signifies that the markets are turning nervous, especially as the pandemic-induced fear intensifies. Pan said:
“With 43 days to the U.S. election, fingers crossed may be what little one can do when it comes to the fiscal stimulus hopes.”
The Fed’s message on the current state of the economy and the stock market is clear. It is screaming that the central bank cannot rescue the markets alone, and the government has to do its part.
Other reserve currencies are outperforming the U.S. dollar.
With low-interest rates and rising liquidity, the Fed has already established a favorable macro backdrop for the stock market. The remaining missing puzzles are vaccines and stimulus, and the latter has a higher probability of getting approved first.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the securities mentioned.
Last modified: September 23, 2020 2:31 PM