The Fed delivered a message to the stock market: Big rallies will prolong pain

It was a “don’t make me come back there” moment from the Federal Reserve.

A line from the minutes of the central bank’s December policy meeting released Wednesday afternoon was taken by analysts and economists as a warning to financial market participants that bets on a policy pivot in 2023 aren’t welcome. And, to the extent that equity rallies and other financial market developments loosen overall financial conditions, those wagers will only force the Fed’s policy-setting Federal Open Market Committee to prolong the pain necessary to bring down inflation.

Read: No Fed official expects an interest-rate cut to be appropriate this year, meeting minutes show

Here’s the line: “Participants noted that, because monetary policy worked importantly through financial markets, an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the Committee’s reaction function, would complicate the Committee’s effort to restore price stability.”

In plain English? “Translated from Fedspeak, the FOMC members do not like stock market rallies, since they fear it could result in potentially inflationary consumer spending,” said Louis Navellier, president and founder of Navellier & Associates, in a Thursday note.

And what can the Fed do about it?

“Said differently, if equities continue to rally on bad economic news, the Fed will need to push forward to an even higher terminal rate and unofficially add ‘weaker stocks’ to the mandate,” wrote Ian Lyngen and Benjamin Jeffery, rates strategist at BMO Capital Markets, in a Wednesday note.

“The minutes revealed another deliberate effort to dissuade the market of the notion that the Fed ‘put’ will be triggered in 2023,” they wrote.

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