In a sea of bulls, one bear has emerged: Harvard University professor Martin Feldstein said on Friday that rising interest rates could send stocks into a downward spiral.
In March, the Federal Reserve is expected to announce its policy rate hike outlook for 2018. In September, Fed officials predicted it would raise rates three times in 2018 and twice more in 2019.
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“The market is up so much driven by the Fed—now the Fed is reversing. It’s pushing up interest rates. It’s undoing the big buy of long-term bonds. So I think as interest rates rise, we could see the stock market go back to a much more normal price earnings ratio,” Feldstein told FOX Business’ Maria Bartiromo on “Mornings with Maria.”
Since Donald Trump’s election, the market is up $7.5 trillion in value, but Feldstein expects monetary policy to continue driving the markets. He also believes investor fears are another catalyst.
“What happens if there is this [economic] downturn, and the Fed doesn’t really have the ability to offset it?” he asked. “If we get a big downturn in the market, consumers are going to respond negatively and businesses are going to respond negatively.”
Even so, the economy will remain healthy as long as the market doesn’t turn down.
“I wish I had a different picture of what the risks are,” he said. “But I would say the economy is in great shape, but very fragile.”