He said Bank of America In a note, investors will suffer a painful year through 2022, as stagflation will trigger another stock market correction.
The bank explained that “inflation will cause a recession”, and at the present time, inflation is “out of control”, according to “Insider” and seen by “Al Arabiya.net”.
Inflation was rising amid renewed consumer demand with the decline in Corona injuries, along with the ongoing disruptions in the supply chain and the high prices of basic commodities due to the Russian invasion of Ukraine, and prices are rising at a pace not seen in more than 40 years.
Bank of America identified the last two papers to confirm the specter of a recession, according to historical indicators that preceded the recession in almost all previous times that followed spikes in inflation, including in the late 1960s and early 1970s, and in 2008, high interest rates and a weak dollar .
He pointed out that, after the “inflation shock” comes an “interest rate shock” that will eventually lead to a “stagnation shock,” according to the memo.
“Of America” added that this stagnation will lead to the S&P 500 index falling below the main level of 4,000 points by the end of 2022, which represents a potential decline of 11% from current levels.
The Fed’s comments revealed that it plans to raise interest rates by 50 basis points in May. The minutes of the latest meeting also revealed the Fed’s plan to reduce its balance sheet by $95 billion per month later this year.
It comes after the Federal Reserve’s balance sheet ballooned to $9 trillion from pre-pandemic levels of about $4 trillion.
Bank of America estimated that the Federal Reserve’s balance sheet of $9 trillion will fall to $6.5 trillion by the end of 2023.
The bank explained that the quantitative easing policy that the Fed has pursued since 2008, has led financial assets to record heights, while quantitative tightening will be an opposite case for it, which means a possible decline in markets, especially since the decline in funding during the past two years has prompted companies to expand credit to finance their businesses amid a pandemic. Globally, this liquidity eventually goes to stocks, which creates purchasing pressures and pushes prices higher.
The bank stated, that the Fed will start a new era, which is delayed in its implementation, to suddenly tighten its monetary policy to address the issues of wealth inequality and inflation through monetary policy, which will begin to reflect its shadows on the stock exchange.
This thinking aligns with former Federal Reserve Chairman Bill Dudley, who wrote in an article last week that the Fed needs to create pain in the stock market to help rein in inflation.
“One thing is certain: for the Fed to be effective, it will have to incur more losses in stocks and bonds than it has so far,” Dudley said.