Right now with earnings growth very strong and the bond market already reflecting a fair amount of Fed tightening (pricing in 5 rate hikes over the coming 2 years), my sense is that the stock market is in OK shape to withstand
some tightening of financial conditions and not unravel in the process.
Therefore, it seems reasonable to assume that if the inflation rate were to rise as a result of changes in trade policy, this could contribute to
a tightening of financial conditions.
Adding to
the tightening of financial conditions, the U.S. dollar has advanced roughly 10 % from its August lows.
This is not uncommon, if we look back to 2013 to see an example of this, the Fed started talking about the quantitative easing taper in the middle of 2013, and by Sept 2013 the expectation was they were ready to go, but they held back for 3 more months because of
the tightening of financial conditions.
Other things equal, the appreciation represents
a tightening of financial conditions for firms in the traded sector of the economy, but it has occurred against the backdrop of a steady rise in the terms of trade and, over recent months, a brighter outlook for the world economy.
Higher interest rates, falling stock prices and a weak dollar represent
a tightening of financial conditions — which have been very easy for a long time, a key source of fuel for the long bull market.
The immediate priority is to counter
the tightening of financial conditions and increase in bank funding costs caused by the crisis in the eurozone.
but
the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market.
Does not take credit that
the tightening of financial conditions happened largely because of FOMC communications.