An empty desk sits ahead of a news conference following a Federal Open Market Committee (FOMC) meeting in Washington, D.C., U.S. (Photographer: Andrew Harrer/Bloomberg)

Why Fed May Need to Follow Through on Pivot to Sustain Stocks

(Bloomberg) -- Stocks have barnstormed their way into 2019, but investors may soon enter a “show me the money” phase as they contemplate a slowing U.S. economy and a pending plan from the Federal Reserve to bring its liquidity tightening to an end.

The coming few months will be critical to see if sentiment ranging from consumers to businesses can weather what’s likely to be a patchy period for economic data, says Steven Wieting at Citigroup Private Bank. And that in turn will determine where the markets go, he says.

“We’ve arrested the tightening in financial conditions, but they need to follow through,” Wieting, the bank’s global chief investment strategist, said of the Fed. The U.S. central bank has clearly put interest-rate increases on pause, but needs to proceed with its plan to stop shrinking its bond portfolio, he said in an interview last week in New York.

Why Fed May Need to Follow Through on Pivot to Sustain Stocks

Last quarter was a warning sign that the Fed badly needed to shift gears, Wieting said. Now that it has put plans for interest-rate hikes on pause, the chance of a hard landing has lessened.

“Lots of things have to go wrong” to get a recession, he said.

Clarity is still pending on the central bank’s plans for running down its bond portfolio. Chairman Jerome Powell said earlier this month that policy makers are “well along in our discussions of a plan to conclude balance-sheet runoff later this year,” without indicating when an announcement will be made.

The Fed needs to be in a mode where it’s “protecting the expansion, not restraining it,” Wieting said in a subsequent Bloomberg Television interview. In the scenario where a new downturn is avoided, “we’ll still be higher, a bit, in U.S. markets looking at it over the next year. We’ll have decent returns over two years.”

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