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Tightening vs. Normalization

By Matthew Kerkhoff


Exactly what is the difference? And which is the Fed’s primary objective?


You might think I’m splitting hairs by discussing these as two separate objectives, but I believe there is a key distinction that will impact markets over the next few years.


We know that markets discount future conditions. Of all the information being priced in at any given time, intentions are of critical importance. If you don’t believe me, just look at what happened to the biotech group over the last six weeks.


In late September, Hillary Clinton’s tweet about high drug prices caused a frenzy in the health care sector. She signaled her intention to combat the high cost of prescription drugs, and this triggered a repricing of the entire group.


I believe the market will take similar cues from the Fed over the next couple of years. They will zero in on the Fed’s intentions, and market prices will adjust ... Log in or subscribe to continue reading.

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