Financial markets continue to digest what Chair Jerome Powell calls 'restrictive' policy very well.
More than two years into the most aggressive Federal Reserve monetary tightening in four decades, the big surprise is that the world hasn’t fallen over.
Privatisation of risk When tech stocks started falling in 2000, and subprime-mortgage related assets tumbled in 2007, it was visible to all. As fears of losses spread, fire-sales affected more and more assets, causing wider contagion — ultimately walloping the economy. Pension funds and insurance companies investing in private-credit funds are unlikely to ask for their money back tomorrow, reducing the risk of sudden stops in funding.Just because nothing in this area has produced a major blow-up yet doesn’t mean it won’t happen. A recent incident where a company shifted assets away from the reach of its lenders — part of a move to raise fresh financing — was an eye-opener for many on Wall Street.
Government debt powers growth The 1990s expansion ended in a crash after companies overextended, besotted with dreams of dot-com riches. In the 2000s, it was households that leveraged themselves, borrowing against expected gains in home equity. This time around, it’s the federal balance sheet that has played an unusually large role in the expansion.
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