Fed's Comments Triggered Overreaction in the Market, Says Former Fed Vice Chair

Investing.com -- According to former Vice President Alan Blinder, the markets have overreacted to the Federal Reserve's recent comments. Blinder describes this reaction as the most intense response the S&P 500 has shown on a Fed decision day in over a decade. As a Professor of Economics at Princeton University, Blinder expressed his views in an interview with Bloomberg TV. He suggested that reactions in calm markets can be three times greater than necessary, while in panic markets, they can be ten times as much. He included the current reaction in the latter category.

According to Blinder, the message that the Federal Reserve should be interpreted as somewhat hawkish did not indicate a significant shift in the central bank's stance on inflation. The message reflected that the U.S. economy is growing stronger than expected compared to six to nine months ago. Additionally, the downward trend in the inflation rate appears to have stalled in recent months.

Blinder also addressed the potential impacts of the policies promised by President-elect Donald Trump. He explicitly labeled these policies as inflationary, highlighting proposed tariffs and labor supply restrictions as sources of concern, particularly for the Federal Reserve. He speculated on the likelihood that the Fed would enact cuts smaller than the anticipated 50 basis points, citing the unpredictability of Trump's actions regarding tariffs as a rationale.

Furthermore, he pointed out the uncertainty surrounding the federal funding agreement, suggesting that it could complicate the Fed's balance sheet reduction only slightly. He noted that Congress could postpone this issue for several months.