Perhaps investors are not quite used to it, but the well-known "Fed put option" may really be over and will be replaced by the Fed "call option" in the short term. Market participants say that the financial environment is tightening in an orderly manner. this is exactly the "ideal state" that the Fed wants.

Bloomberg commentedIf you are a Fed policy maker, the stock sell-off of the past few weeks will give you a glimmer of hope.

In February this year, Credit Suisse star analyst Zoltan Pozsar saidFederal Reserve Chairman Powell must let the market collapse to trigger the economic slowdown he desperately needs to curb inflation.

Wall Street has previously mentioned that in late March, as US stocks ushered in one of the sharpest rallies in history, BofA derivatives strategists said the bear market rebound reflected the arrival of short-term "Fed call options".

The "Fed put option" originally meant that when the stock market plummeted, the Fed would in most cases lower the federal funds rate, while the "Fed call option" was the opposite.

At present, the Fed is seeking stricter financing conditions to help them fight inflation, which in effect means reducing the value of risky assets. As a result, they may raise interest rates more quickly when the stock market rises, thus limiting the rise of the stock market. A case in point is that financial conditions indicators have effectively relaxed since the FOMC meeting in March, prompting comments from Fed officials about the "50 basis points".

BofA also reminded investors that it is time to stop counting on "Fed put options" to rescue the market. Because now that the "Fed put option" has been transformed into a "Fed call option", any move in the market will cause trouble.

If financial conditions do not tighten and inflation remains high, the Fed will need to raise interest rates further.

Echoing the recent plunge in US stocks and technology companies with high share prices, a basket of cross-asset measures of financial conditions, from equities to fixed income, has finally begun to tighten over the past week.

Financial conditions in the US have shrunk to-0.73, close to the most tense level since 2018 (excluding the 2020 outbreak), according to a Bloomberg indicator.The indicator relaxed after the Fed's March meeting, when policymakers launched tightening with a 25 basis point rate hike, undermining their efforts to curb demand and inflation.

That could be good news for Fed officials who meet next week.Bloomberg expects the Fed to raise interest rates by 50 basis points for the first time since 2000.In March, Mr Powell stressed that financial conditions were the transmission mechanism for monetary policy to "touch the real economy" and that the former should contract as the central bank raised borrowing costs.

According to Bloomberg, Dan Suzuki, deputy chief investment officer of consulting firm Richard Bernstein Advisors, said:

“For the Fed, this could be very close to the best-case scenario-the financial environment is tightening and has so far been quite orderly.At the same time, the correction in the stock market has been taking place in the larger part of the bubble, and despite wild swings in US bond yields, there has not been much spillover effect on the credit markets. "

Today, the market is becoming less and less active, with interest-rate-sensitive large stocks bearing the brunt of this week's sell-off as investors prepare for a massive Fed rate hike. Risk aversion has seeped into credit markets and credit spreads are widening to March highs, but are still not far from historic lows.

In addition to falling stocks and bonds, demand for newly listed stocks and corporate credit has also tightened in the primary market, according to Jefferies.

Jeffery strategists led by Sean Darby wrote in a report on Tuesday:

It is worth noting that corporate bond issuance and IPO activity have cooled since the beginning of the year. In addition, companies seeking second round financing or negative free cash flow are finding that financial markets are much cooler than they were a year ago. "

Even so, Liz Young, head of investment strategy at online personal finance firm SoFi, says the tightening of financial conditions is still moderate.

Young said:

"We are basically back to where we were after the pullback at the beginning of the year, which is not too bad given the current situation. In the Fed's view, at least it is not serious enough to pose a huge risk to the financial situation. "

Gene Tannuzzo, global head of fixed income at Columbia Threadneedle, an asset management company, saidAll this suggests that once the Xiaobai Maimai Inc market recovers, the Fed will eventually need to raise interest rates by more than planned.

Tannuzzo said:

"tighter financial conditions are the mechanism to reduce demand and ultimately slow inflation. In the Fed's view, if financial conditions do not tighten and inflation remains high, they will need to raise interest rates further. "