Investor Alert

New York Markets Close in:

Project Syndicate Archives | Email alerts

Aug. 6, 2022, 4:00 p.m. EDT

Four fairy tales that stock market investors and economic policy makers are telling themselves

Watchlist Relevance

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

  • X
    30-Day U.S. Federal Funds Continuous Contract (FF00)
  • X
    U.S. 10 Year Treasury Note (TMUBMUSD10Y)
  • X
    S&P 500 Index (SPX)

or Cancel Already have a watchlist? Log In

By Anatole Kaletsky

1 2

Don’t fight the Fed

Such a conclusion seems obvious—except to financial traders subject to a third cognitive bias: “Don’t fight the Fed.” This favorite market saying asserts that once the U.S. central bank gets serious about achieving an objective, such as an inflation target, investors should always assume that it will get its way.

This makes sense when the Fed is genuinely prepared to do whatever it takes to meet its goals, for example by clearly pursuing low inflation regardless of the effect on unemployment, stock markets, and debt-servicing costs. But today’s Fed is so focused on “well-anchored” inflation expectations that it is quite relaxed about “backward-looking” data that continue to show prices rising much faster than most businesses and workers have ever seen.

Nothing new under the sun

That leads to a final bias: Most people find it difficult to imagine events that have never happened in their lifetimes. For many investors and policy makers, stubbornly high inflation falls into this category. Market wisdom expresses this bias with the  adage  that “there are no new eras.”

But new eras do happen, as the world learned painfully in 1973. And today’s interaction of Russia and COVID-19 with monetary and fiscal expansion has created unprecedented conditions, which guarantee that the period ahead will be very different from the past 40 years.

The question is whether the new era now dawning will be dominated, for the first time in a generation, by persistently rapid price growth; or whether, for the first time in history, we will painlessly overcome an inflationary crisis with negative real interest rates and without the collateral damage of a major recession. Markets and central banks confidently expect a new, carefree epoch. If they are right, we can all live happily ever after.

Anatole Kaletsky, chief economist and co-chairman of Gavekal Dragonomics, is the author of “Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis” (Public Affairs, 2011).

This commentary was published with permission of Project Syndicate — Why Are Financial Markets So Complacent?

More on the market and the economy

Nouriel Roubini: Stocks could drop 50%. Things will get much worse before they get better.

Joseph Stiglitz: How an arrogant and pathological America could lose the new cold war

Mohamed El-Erian: The people in the global penthouse should worry about the ‘little fires everywhere’ in the basement

1 2
This Story has 0 Comments
Be the first to comment
More News In
Economy & Politics

Story Conversation

Commenting FAQs »

Partner Center

Link to MarketWatch's Slice.