Wasp sting from the Fed

The first red day in the markets in the United States is a fact. The first week is not over yet or the hoary mood has completely disappeared. Traders seized on an unexpected comment in the Fed minutes of last December’s meeting, published last night, to take some money off the table. The S&P 500 index ended 1.9 percent lower, the Dow Jones fell 1.1 percent, and the technology exchange Nasdaq closed 3.3 percent in the negative. The negative price results in New York were followed this morning in Japan, where the Nikkei closed 2.9 percent lower. In Europe, markets opened about 1.5 percent lower on average this morning.

The released Fed minutes show that the members of the policy committee were quite shocked by the rising inflation, which seems to be less temporary than expected. The reaction to this of faster phasing out of the support program and hints at three rate hikes in 2022 were by now known and priced in. But new for analysts was the comment in the minutes that most Fed members believe that the Fed should also deleverage more quickly once the first-rate hike is a reality. 

The Fed currently has some $8.76 trillion in bought-up assets on its balance sheet. By not reinvesting the freed-up funds from bought-up bonds that are paying off, but instead withdrawing them, the liquidity of the financial markets is decreasing at an accelerated rate. When American traders realized this, they reacted as if stung by a wasp. Stock markets fell and long-term interest rates rose. Instead of three, four interest rate hikes are already being priced in for this year. Investors are already looking forward to the Fed’s next meeting, which will take place January 25-26, for confirmation of their fearful suspicions.