U.S. Federal Reserve officials see the strong economic recovery and higher than expected inflation as paving the way for key rate hikes this year, perhaps sooner or at a faster pace than previously expected, according to the report. December 14-15 Fed meeting report, released Wednesday evening.
Thus, according to these Fed “Minutes”, “participants noted that given their individual projections for employment and inflation, it may be necessary to raise the fed funds rate sooner or later. a faster pace than participants previously anticipated “.
Several members of the Monetary Policy Committee (FOMC) also considered that the goal of full employment had already been reached in the United States. Full employment is one of the conditions set by the Fed before raising its key rates, reduced to around zero since 2020 to combat the effects of the Covid-19 crisis.
Towards an anticipated reduction in the Fed’s balance sheet
In addition, some members of the Fed have spoken in favor of a reduction in the Fed’s balance sheet “shortly after” the start of the rate hikes, which would constitute further monetary tightening. The question of the reduction of the balance sheet, which swelled from 4.4 trillion dollars before the pandemic to 8.670 billion at the end of 2021, was the subject of a broad discussion between the members of the monetary policy committee, specifies the report.
If the Fed started reducing its balance sheet soon after the rate hikes started, it would act much faster than in the last bull cycle. It had started to raise rates in 2015, but then waited two years before starting to reduce its balance sheet from 2017.
Remember that the Fed decided on December 15 to accelerate the end of its asset purchase program, now scheduled for the end of March instead of mid-2022. In its new projections, the Fed also indicated that it planned to hike rates at least three times this year to support the recovery and curb the surge in inflation, which reached 6.8% over one year in November. in the United States, the highest since 1982!
The stock market struggles, technology stocks fall
On Wall Street, stock indices fell after the publication of the Fed’s “Minutes” at 8pm. About an hour after the publication of the report, the Dow Jones lost 0.64% to 36,565 points (against + 0.22% before the Minutes), while the large S&P 500 index fell 1.4% to 4,726 pts (against -0.38% before), and that the Nasdaq Composite, rich in technological and biotech stocks, dropped 2.67% to 15.204 pts (-1.4% previously). The Nasdaq has now corrected by more than 5% from its last record on November 19.
The dollar index, which fell 0.3% before 8 p.m., reduced its losses to 0.09% thereafter against a basket of benchmark currencies, at 96.18 points. The 10-year T-Bond yield tightened to 1.7% (+5 basis points) against 1.68% before 8 p.m., and 1.5% on December 31.
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