The Fed’s Communication and Actions ‘Creating Instability’

© Reuters. The Fed’s Communication and Actions ‘Creating Instability’ – Wells Fargo

By Sam Boughedda 

Wells Fargo analysts said in a note on Monday that the Federal Reserve has “over-communicated.”

“The Fed’s consistent message has been its commitment to price stability. We believe them, as do most investors,” wrote the analysts. However, Wells Fargo (NYSE:) believes the Fed’s communications and actions are “creating instability across capital markets.”

“This is (in part) because the message implies a “Fed put” despite growing systematic risk, and recent market dislocations remains far out-of-the-money,” the analysts added.

The analysts also pointed to the BoE only reacting to market dislocations after Gilts rose ~120bps in one week.

“What is troubling is the apparent downplaying of capital market signals as the Fed trudges toward its 2% inflation target. Therefore, those signals will need to get louder (i.e. even lower equities and wider spreads) before the Fed reacts. This also implies the recession likely will be longer/more severe than current fundamentals and market risk indicate,” concluded the analysts.

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