Bank of America Merrill Lynch Research discusses a hot question on investors' minds is as equity market weakens: what will it take for the Fed to respond and pause or stop hiking? In other words, what is the "Powell put".
"There is a "put," but the "strike price" is much lower than it was at the beginning of the tightening cycle," BofAML argues.
"The Fed is much more likely to respond to market weakness if signals a bad economy ahead. In recent weeks there has been a lot of doom and gloom talk. The economic recovery is"old." Growth and profit growth are peaking. Interest sensitive sectors like autos and housing are rolling over. What if this is not a "correction"? What if the equity market is correctly smelling a recession ahead? After all, history shows that every bear market begins when the equity market correctly smells a recession 3 to 13 months ahead," BofAML adds.
"Our Chief Investment Strategist Michael Harnett quips that "markets stop panicking when central banks start panicking." However, this time around we think the markets will have to find a floor without Fed help. We continue to expect quarterly rate hikes from the Fed," BofAML concludes.