BofA with a quick insight into why the Fed is not worried about stock prices right now.
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As the equity market continues to sell off, investors are asking: what does this mean for the economy and how bad does it need to be for the Fed to pause? On these questions, a picture is worth a 1000 words:
• People close to the market are understandably unhappy about the 17% drop in the S&P 500 since the end of last year (Exhibit 1).
• By constrast, absent a disorderly “meltdown” the Fed is likely more focused on the fact that stocks are still 15% above their pre-crisis peak (Exhibit 2).
• Indeed, in a typical consumption model, households react to sustained changes in prices over a period of three years or so. The “wealth effect” is still positive.
