How will the Fed respond to the market—and does it even matter?

Central bank policy was top of mind on Wall Street on Thursday, but experts were divided in deciphering the path forward.

Less than a week before the next Federal Reserve meeting, theEuropean Central Bank outlined an unusually pointed plan for weakening the euro. With other central banks loosening money supplies amid vacillating U.S. equity markets, the Fed is now faced with interpreting the health of U.S. economy — and matching interest rates accordingly.

Would signals of a potential recession cool the Fed’s tightening? Or are equities simply uncoupled from an otherwise healthy U.S. economy — one that can withstand higher interest rates? Further, does a Fed move matter either way to the markets, with larger-scale tensions in commodity markets, in China and the Middle East?

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‘Extreme market fear’

Richard Farr, chief market strategist for Merion Capital Group, said Thursday the U.S. economy is “moving very slowly toward recession.” Farr sees a connection between central banks and equity markets, saying that while cheap money from low interest rates might spur investing, it might also push stock prices up too far.

“You’ve got to be willing to take out a loan. You’ve got to be willing to invest,” Farr said on CNBC’s “Squawk on the Street”. “If that’s not the case, you’ve got a problem. But here’s the thing: If interest rates are negative, ultimately, the more negative you go … the more negative the terminal value is on your investments. So the goal is to push stock prices up at all costs. And so far, at least in the last few months, it’s not been working out.”

Jurrien Timmer, director of global macro at Fidelity Investments, also sees central bank policy — in particular, the tug of war between the Federal Reserve and the People’s Bank of China — as pivotal to the stock market’s recent volatility. But he said the U.S. economy remains in pretty good shape.

[“source -pcworld”]