The Federal Reserve has become a leading force in the stock market over the course of its more than hundred years of existence.
This stature was strengthened by the central bank’s introduction of two unconventional policy tools in the 2000s – large-scale asset purchases and forward guidance.
Large-scale asset purchases refer to the Fed’s emergency purchases of Treasuries and mortgage-backed securities. Forward guidance refers to the central bank’s public statements on future monetary policy developments. The guidance often indicates the expected path of interest rate targeting for federal funds in advance of a policy change.
Central bankers have repeatedly told the public in 2022 to expect tougher economic conditions to fight inflation. Economists believe this has contributed to months of declines across the S&P500.
“I think they know they’ve gambled and lost and they need to do something serious to get inflation under control,” said Jeffrey Campbell, an economics professor at Notre Dame University and a former Federal Reserve economist. “I’m afraid they took a gamble that early 2021 inflation wasn’t all that real.”
The Fed has responded to hotter-than-expected inflation with seven rate hikes in 2022. These higher interest rates can weigh on publicly traded companies, particularly growth stocks in the technology space.
Meanwhile, the Fed’s asset portfolio has shrunk by more than $336 billion since April 2022. Experts tell CNBC that the full combined impact of this economic tightening is unknown.
That’s why many people on Wall Street are waiting for the central bank to change course and cut interest rates again. At the same time, many financial advisors urge caution.
“If you have someone who has a thumb on the scales or has a distinct advantage about what’s going to happen, whether we think good things or bad things are going to happen, it’s best not to fight that policy,” Victoria Greene said , Founding Partner and Chief Investment Officer at G Squared Wealth Management.
Still, many experts believe that central bank policy is only one piece of the puzzle. Both black swan events and investor sentiment also play a massive role in shaping how the markets perform. “Don’t fight the Fed, but… don’t believe too much that the Fed is omnipotent,” said John Weinberg, policy adviser emeritus in the research department of the Federal Reserve Bank of Richmond.
Watch them Video above to learn how the Fed shaped the stock market in 2022.