The forward P/E ratio for the S&P500 is currently 15, a level last seen in 2019 when inflation was 1.8%.
Inflation today is 8.2%, and the Fed is raising rates aggressively to slow down GDP growth and slow down growth in the “E” in the P/E ratio.
The Fed does not worry about how much or how little the S&P500 has declined since the peak in 2021. In other words, it is not important to the Fed if the P/E ratio today is 10, 15, or 20.
What the Fed worries about is that inflation at 8.2% is much higher than the FOMC’s 2% inflation target. And with the Fed stepping hard on the brakes, the downside risks to equity and credit markets remain significant.
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