Daily Alert – Thursday 6th January 2022: Hawkish Fed surprises markets
The Fed’s FOMC Meeting Minutes, which were published last night at 7pm BST, surprised the markets. The meeting itself, on 15th December, calmed the markets as Chair Powell convinced traders that inflation could be brought under control without drastic interest rate hikes. Fears of a “hawkish mistake” abated. However, yesterday’s minutes revealed the hawkishness is perhaps more widespread in the committee than previously thought.
To quote from the minutes…it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated. Some participants also noted that it could be appropriate to begin to reduce the size of the Federal Reserve’s balance sheet relatively soon after beginning to raise the federal funds rate. Some participants judged that a less accommodative future stance of policy would likely be warranted and that the Committee should convey a strong commitment to address elevated inflation pressures.
So, in a nutshell: rates up soon, then let’s remove the life support everyone has become accustomed to.
As always, nothing is set in stone, but the Fed say these things for a reason. It’s an indication of likely direction of travel. As expected, equities dropped (inflation is bad for corporates), the USD rose (more attractive bonds coming soon) and bonds sold off, and, as such, yields rose (Fed dumping bonds soon).
It’s Thursday and I don’t usually trade on a Thursday. However, Jerome Powell has given us a late Christmas present. I will be looking to trade US equities long as yesterday’s drop reverses. It may not happen today, but it is likely to happen. It’s not a complex trade, but it has been very profitable throughout 2022.
That’s it from us. We’ll be back on Monday. Have a great weekend when it comes.
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