The minutes of the Federal Reserve’s December meeting, released last night, shows that Fed officials were concerned about America’s “elevated levels of inflation”, and considering normalising monetary policy faster to combat rising prices.
Stock markets are taking a tumble today after America’s central bank revealed it could raise interest rates sooner or faster than expected, to tame US inflation.
Participants generally noted that, given their individual outlooks for the economy, the labor market, and inflation, it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated.
In a hawkish turn, the Fed minutes say:
Some policymakers also argued the Fed could stat to cut the size of its balance sheet “relatively soon” after beginning to raise the federal funds rate. It’s currently on track to end its pandemic stimulus bond-buying programme in March.
Officials pointed to America’s “increasingly tight labor market”, and the jump in prices which they attributed to supply and demand imbalances and the reopening of the economy. US inflation hit 6.8% in December, its highest since 1982.
The minutes spooked Wall Street, sending the tech-focused Nasdaq Composite down by over 3% in its biggest one-day drop since February.
05-01-2022 Major U.S. stock benchmarks ended sharply lower Wednesday, with the tech-heavy Nasdaq Composite index suffering the steepest decline.
The Dow Jones Industrial Average lost about 1.1%, according to preliminary data. pic.twitter.com/PAXvr7eQyH January 6, 2022
A strong US jobs report (US companies added 807,000 employees in December) also fuelled expectations that the Fed could normalise policy faster. Ipek Ozkardeskaya, senior analyst at Swissquote, explains:
We are now stepping into a period where good data is bad as it fuels the Fed hawks, and bad data is bad, as well, because it can’t fuel the Fed doves. Asia-Pacific markets have followed Wall Street’s lead, with Japan’s Nikkei sliding 2.9%.
The ADP data revealed that the US economy added more 800K new private jobs in December, twice the 400K expected by analysts, and as strong as the figures we used to see at the heart of the post-pandemic recovery last year. But helas, the strong data added to the hawkish Fed expectations, as it reinforced the Fed’s view that the US economy is close to a full employment and it’s time to move on. Yesterday has been a deep red day for the US equities, as the FOMC minutes hinted at earlier and a faster rate normalization path, and the reduction of the Fed’s balance sheet soon after the first rate hike. The extra hawkish element hammered the sentiment sending the US yields higher and the equities lower. The better-than-expected ADP data certainly gave an extra support to the Fed hawks.