Morgan Stanley IM: An Inconvenient Trinity: Financial Stability, Policy and Politics
Jim Caron, Co-Lead Global Portfolio Manager and Co-Chief Investment Officer, Global Balanced Risk Control Team, shares his macro thematic views on key market drivers.
22.03.2023 | 06:05 Uhr
During times of crisis, measures to contain market volatility
intersect with the need for financial stability, Fed policy actions and
Ideally the three should work in unison, but there are times when they are in conflict. Now is one of those times.
Liquidity facilities have been established to stem the crisis. This
has increased the Fed balance sheet by about $300 billion, making many
question if this is QE - and if it’s inflationary.
Regardless, it may conflict with the Fed's monetary policy goals to
stem inflation, and while the Fed would like to separate decisions about
financial stability and monetary policy, they are unfortunately
Politics are always present. For the Biden administration, the Bank
Term Funding Program (BTFP) lending facility bears all the hallmarks of
another “bailout” for banks.
Given the optics of the BTFP, which is big and powerful, it may not
be publicized as clearly as it should be, possibly detrimental to
restoring confidence in the banking system.
All in all investors need to adjust their probabilities upward for recession risk. What is happening now is not a non-event and will certainly have credit implications for the real economy.
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