Markets News & Opinions

Gung-Ho Fed Exposes ‘Gigantic Hole’ That May Rattle Stock Market

The Federal Reserve has taken an aggressive approach to save the stock market. Yet economists argue that the central bank's strategy is ineffective - and may not be enough.

  • As the U.S. stock market starts to correct from recent highs, economists warn the PPP and liquidity are being mismanaged.
  • The Fed has left ‘a gigantic hole’ for U.S. states, says Nobel laureate Paul Krugman, which may threaten an economic recovery.
  • Geopolitical risks arising from the Middle East-Russia oil war adds more pressure on equities.

The Federal Reserve has taken an aggressive approach to rescue the stock market and the U.S. economy from the consequences of the coronavirus pandemic in the past two months. Yet, economists and traders argue that the efforts have been lackluster to date.

The absence of local fiscal relief at the state level could leave the stock market vulnerable to another downturn as the economy heads downward with record-high jobless claims and uncertainty around reopening unessential businesses.

The U.S. stock market observed a v-shape recovery since March 23, as the Dow Jones Industrial Average climbed from 18,591 to as high as 24,242 points.

U.S. stock market begins to correct from a 33% gain since March 23 | Source: Yahoo Finance

A gigantic hole is opening up that may rattle economic recovery

In an interview with Joe Weisenthal on “Bloomberg Markets: What’d You Miss?,” Paul Krugman, Nobel laureate and economics professor at Graduate Center, City University of New York, said the Fed’s weak fiscal policy puts the U.S. economy at risk of a halted recovery.

Despite the strong reaction of the stock market to the two Senate stimulus packages to support both large and small businesses, Krugman emphasized that money is not being funneled across the country.

The economist said:

The response [from the Fed] is two things: it is way insufficient on several fronts and the money is not really flowing. I am very disappointed [in the latest Senate deal] because there is no state and local fiscal relief, and that is a gigantic hole that is opening up. Everyone knows it is there and it is going to be a real impediment to economic recovery.

Krugman further criticized parts of the Senate deal, including the Paycheck Protection Program (PPP), stating that the money went to the wrong people and not small businesses.

Several large profitable businesses such as Shake Shack recently came under fire for receiving a multi-million dollar loan, which it has since returned.

The mismanagement of the PPP and the challenges of the Fed to provide sufficient liquidity throughout the 50 states impose an additional threat to the rebound of the U.S. stock market and economy.

Massive volatility of oil shows stock market isn’t really fine

On top of the coronavirus pandemic, geopolitical risks arising from the tension between the Middle East and Russia are fueling uncertainty in the global stock market.

Sven Henrich, the lead market strategist at Northman Trader, said that the abrupt plunge of oil price to sub-zero indicates that the illusion of markets being just “fine” put out by the Fed is simply not the case.

The strategist stated:

The Fed may have provided the illusion that things were fine, but oil served a crude awakening that this is not the case.

As previously reported, the price of oil dropped to as low as negative $40 per barrel. The price of oil has recovered to around $11 since, but it still remains at a two-decade low.

The massive volatility across all major assets and commodities, including oil, gold, and stocks suggests that the U.S stock market is far from seeing stability in the near-term.

Last modified: September 23, 2020 1:50 PM

Joseph Young

Financial analyst based in Seoul, South Korea. Contributing regularly to CCN and Forbes. I have covered the stock market and bitcoin since 2013. Reach him on Twitter or LinkedIn.