Markets Are Akin to a New Fed Policy Mandate, Prudential Says

Financial-market concerns have become something like a new third mandate for the Federal Reserve, alongside its statutory objectives of price stability and full employment, according to Prudential Financial Inc.

“The Fed has underpinned this market and it’s been complemented by monetary policy,” said Quincy Krosby, Prudential’s chief market strategist. “You may not like the fact that it has extinguished concepts of capitalism like creative destruction. But central banks refused to allow market forces to take over. They don’t want a complete collapse of the economy and the markets.”

Markets Are Akin to a New Fed Policy Mandate, Prudential Says

Numerous investors have warned about a potential market reckoning from the Fed’s involvement. Scott Minerd, chief investment officer at Guggenheim Investments, has been particularly vocal in his objections, envisioning among other things an extreme bubble in corporate bonds. BlackRock Inc.’s Peter Gailliot said the Fed is “crossing some lines” and cautioned about potential moral hazard. Some are concerned that the stock market’s recovery might reduce appetite for further fiscal stimulus measures out of Washington.

But Krosby argued that things could have been very different if the Fed had stayed out of the way.

“You trade in the market you have, not the one you want,” Krosby said. “Yes, it created zombie companies but it also opened the credit markets, and that’s key for the future.”

The Fed by a 1977 law was assigned the goals of “maximum employment, stable prices, and moderate long-term interest rates,” but has also been charged by Congress with promoting financial stability.

“You’ll hear, ‘oh, this is artificial.’ Why is this artificial? It is what it is,” Krosby said of the current state of financial markets. “Price is price.”

©2020 Bloomberg L.P.

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