Federal Reserve Watch: Seriously, the Fed is going to tighten

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He didn’t make the front page of the Wall Street Journal, but he made the front page of the Financial Times.

“The Fed will make ‘rapid’ cuts to its balance sheet next month!”

This is from the first page of FinancialTimes.

The source of this news is the speech delivered on Tuesday by the governor of the Federal Reserve, nominated to become vice-chairman, Lael Brainard. The full speech can be found here.

Specific words:

“The (FOMC) will continue to methodically tighten monetary policy through a series of interest rate hikes and beginning to shrink the balance sheet at a rapid pace beginning at our May meeting.”

“I expect the balance sheet to shrink considerably faster than in the previous recovery…”

“The reduction in the balance sheet will contribute to the tightening of monetary policy beyond the expected increases in the policy rate reflected in market prices and the Committee’s summary of economic projections.”

“The Committee stands ready to take stronger action if inflation indicators and inflation expectations indicate that such action is warranted.”

“We are committed to bringing inflation back to the 2% target, recognizing that stable and low inflation is essential to maintaining a strong economy and a working labor market for everyone.”

Additionally, several FOMC members have publicly stated that the Fed needs to raise its key interest rate by 50 basis points a few times this year and not just raise the rate by 25 basis points.

The Financial Times article also provided the following information:

Economists expect the Fed to reduce its securities portfolio by about $105.0 billion each month, with $60.0 billion coming from the Treasury bill portfolio and $45.0 billion from the portfolio. mortgage-backed securities.

So here is.

At least it’s a start.

And the reaction

Well, on Tuesday stock prices closed.

The S&P 500 index fell from a Monday close of 4,583 to a Tuesday close of 4,525.

Stock prices had risen as investors appeared to believe the Federal Reserve was not really tightening.

I wrote two blogs last week examining this fact. Last week, stock prices rose and there seemed to be enough evidence that the Fed was not, in fact, tightening that much.

Since then, it seems that FOMC members have been speaking out, trying to show they really meant it when they raised the policy interest rate at the last FOMC meeting and talked about future changes to the balance sheet of the Fed.

This morning, Wednesday April 6, the futures market showed that the S&P 500 stock index was set to decline for the day.

When the market opened on Wednesday, the S&P 500 futures index was down about 50 points.

And, people keep talking about what Fed Chairman Paul Volcker did in the 1980s, when the Fed really tightened monetary policy, the effective fed funds rate jumped to over 21%. when examining the current scene.

Although these commenters did not suggest raising the funds rate again above 21%, much was said about the need for the Fed to react relatively harshly in order to stop the inflation rates that were at their highest level in 40 years.

It appears that FOMC members are reacting to this concern and have stepped up their “vocal” advice in order to move investors in the right direction.

How tight?

Now we look at the other side of the coin.

Over the past decade, the stock market has moved with the Federal Reserve’s monetary stance.

Investors have been very sensitive to what the Federal Reserve is doing and this is one of the concerns that can be expressed in the current situation.

If the Federal Reserve really starts to raise the federal funds rate by 50 basis points and if the Federal Reserve really starts to reduce its holdings of securities by $105.0 billion a month, what will happen to prices? scholarship holders?

The bets are that stock prices will fall, and could fall significantly.

But, what else is out there?

If the Federal Reserve goes this route, what will happen in the SPAC part of the market.

I have just written an article on the after-sales service and the difficulties encountered in this space.

I’ve also written about imbalanced conditions in many other areas of the financial markets, as the Fed’s largesse has strained investors’ resolve to find more and more areas where they can find a decent return.

Additionally, there are markets for crypto assets. I have written about how the capital value of cryptocurrencies has followed the stock market. Coinbase estimated that the correlation coefficient between the S&P 500 index and the capital value of cryptocurrencies is 0.56. The price of cryptocurrencies closely follows stock prices.

If the stock market falls in the near future, what will happen to the prices in the field of cryptocurrencies?

What impact will this have on the shift to monetary digitization?

It’s a very uncertain time!

So let’s see what happens to stock prices over the next week.

Will the efforts of the Fed’s FOMC members convince investors that the Federal Reserve is truly serious in its efforts to break the back of inflation and bring inflation back into stable control?

If investors are convinced, stock prices will fall.

If investors are convinced, corporate debt will become very stressful.

If investors are convinced, the prices of crypto assets could really fall.

This raises the question of the future orientation of the Fed. Can the Fed really sustain a substantial decline in stock prices?

About Alma Ackerman

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