Gung-Ho Fed Exposes ‘Gigantic Hole’ That May Rattle Stock Market

  • As the U.S. stock market starts to correct from recent highs, economists warn the PPP and liquidity are being mismanaged.
  • The Fed has left ‘a gigantic hole’ for U.S. states, says Nobel laureate Paul Krugman, which may threaten an economic recovery.
  • Geopolitical risks arising from the Middle East-Russia oil war adds more pressure on equities.

The Federal Reserve has taken an aggressive approach to rescue the stock market and the U.S. economy from the consequences of the coronavirus pandemic in the past two months. Yet, economists and traders argue that the efforts have been lackluster to date.

The absence of local fiscal relief at the state level could leave the stock market vulnerable to another downturn as the economy heads downward with record-high jobless claims and uncertainty around reopening unessential businesses.

The U.S. stock market observed a v-shape recovery since March 23, as the Dow Jones Industrial Average climbed from 18,591 to as high as 24,242 points.

U.S. stock market begins to correct from a 33% gain since March 23 | Source: Yahoo Finance

A gigantic hole is opening up that may rattle economic recovery

In an interview with Joe Weisenthal on “Bloomberg Markets: What’d You Miss?,” Paul Krugman, Nobel laureate and economics professor at Graduate Center, City University of New York, said the Fed’s weak fiscal policy puts the U.S. economy at risk of a halted recovery.

Despite the strong reaction of the stock market to the two Senate stimulus packages to support both large and small businesses, Krugman emphasized that money is not being funneled across the country.

The economist said:

The response [from the Fed] is two things: it is way insufficient on several fronts and the money is not really flowing. I am very disappointed [in the latest Senate deal] because there is no state and local fiscal relief, and that is a gigantic hole that is opening up. Everyone knows it is there and it is going to be a real impediment to economic recovery.

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