Commment While Powell’s speech on Friday was greeted with predictable jubilation in risk markets, we would like to make a few observations, especially regarding the firebreak he created between rate hikes and tapering. First, this handy piece of forward guidance was undoubtedly intended to prevent a repeat of Yellen's Taper Tantrum and, in that regard, so far, so good. Unfortunately, equities have overlooked that the balance sheet is also a significant and much more imminent threat to lofty valuations than interest rates. If anything, signalling that you will further delay hikes increases the odds that the Fed will need to taper PDQ to arrest current economic trends (“The Fed’s Balance Sheet: The Definition of Insanity”, 17 August). To that point, if you had any doubts about the importance of QE to stocks, look at yesterday’s price action in European equities after ECB Holzmann’s comment regarding PEPP.
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