Return of “Fed put” adds to fragility risks – Bank of America

Investing.com — At an event in Jackson Hole, Wyoming, last month, Fed Chair Jerome Powell suggested that inflation — recently the key focus of a raft of interest rate hikes by the Fed — had been contained.

As a result, traders are betting that Powell may use the Fed’s next meeting this month to pivot the focus of monetary policy away from price gains to protecting the labor market. 

In a note to clients, analysts at BofA said the Fed may hint that it stands ready to lower rates to shore up the economy and gird against job losses — a tactic known as a “Fed put.”  However, they flagged that this environment posed “fragility risks and major challenges” for active investors.

In particular, they added that an early August slide in stocks stemming from a weaker-than-anticipated nonfarm payrolls report presented evidence that “markets remain fragile, and that fickle liquidity should still be a major concern for investors.” The latest monthly jobs report is set to be released on Friday, and could factor into how the Fed approaches potential rate reductions.

The analysts noted that, along with “challenging” near-term risks, “in the medium-term the combination of AI fervor and a stronger Fed put point to: dips getting bought, risk of bubbles developing, potential for extreme positioning, and right tail risks for stocks.”