Here’s what equity and bond market strategists say after Fed minutes point to the end of the easy money

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The stock market saw its decline deepen on Wednesday afternoon after the release of the minutes of the Federal Reserve meeting in mid-December indicating a more aggressive political tightening plan than market participants had anticipated. 2022.

At the last check, the Dow Jones Industrial Average DJIA,
+ 0.11%
had gone from a modest gain to a solid loss, down 230 points, or 0.6%, to 36,571, all but frustrating hopes that the blue chip index would produce a third consecutive record close to start a year civilian, something he hasn’t done since 1959.

Read: Fed officials assess hikes faster or earlier than they thought

The minutes revealed vigorous discussions among some Fed officials around the central bank that could potentially raise rates and also cut its rates. current balance sheet of 8,800 billion dollars earlier than expected to help cope with the rising cost of living.

The S&P 500 SPX index,
+ 0.28%
was trading down 1.4% and the Nasdaq Composite Index COMP,
+ 0.23%
extended to its previous decline, down 2.7% on Wednesday.

At the same time, the yield on the 10-year Treasury bill TMUBMUSD10Y,
1.753%
rose to around 1.70% after the Fed minutes were released.

Here’s what some strategists and analysts were saying about the meeting record and how it is changing (or not changing) the political trajectory of markets in 2022:

“The extent of QT – quantitative tightening will be important for the discussion of the minutes. When will the Fed begin to unwind its balance sheet by allowing the runoff of maturing securities? Wrote John Lynch, chief investment officer at Comerica Wealth Management, in an emailed statement. “This will prove to be important because it is a more subtle form of political tightening,” he wrote.

Meanwhile, Chris Zaccarelli, chief investment officer of the Independent Advisor Alliance, said the minutes indicated how important the Fed considers it important to normalize its policy amid soaring inflation.

“Given the twin concerns of rising inflation and the potential for negative growth surprises, you can see why they urgently need to complete their cut as soon as possible, while leaving the possibility of choosing the moment of the first rate hike, “he wrote.

The IAA’s CIO said it believed the Fed would act increasingly quickly on tightening its policy, but noted that a difficult question remained unanswered.

“What’s harder to predict is how much liquidation in the market they’re willing to tolerate before they change course – is it 15%? or 20%? – we believe the Fed will experience some short-term volatility in the stock market in order to remove all the monetary accommodation it has injected into the markets, however, it is still likely to heed recession warnings from the stock market (eg a drop of almost 20%) and would suspend their activities in this event, ”Zaccarelli wrote.

Market-based projections had forecast about three interest rate hikes in 2022 from current levels between 0% and 0.25%.

Cliff Hodge, chief investment officer for Cornerstone Wealth, wrote on Wednesday that as FOMC participants “discuss faster and more aggressive rate hikes, alongside a faster pace of balance sheet normalization [aka quantitative tightening or QT) than the last hiking period, indicate that the Fed “put” for the stock market has been repriced lower.

In markets, a put is an option that gives the holder the right but not the obligation to sell the underlying instrument at a set price by a certain time—a valuable hedge if a bullish position goes south. The Fed put is a reference to the idea that the central bank would take steps to soothe markets in the event of a violent downturn.

Ian Shepherdson, chief economist at Pantheon Macroeconomics suggested that the market may be overreacting to the minutes and that the Fed may not so eager to shrink its balance sheet.

“We expect much more on this question at upcoming meetings, but we remain of the view that the Fed is unlikely to dive into outright balance sheet contraction in a hurry,” Shepherdson wrote.

“Rate increases send a clearer message to the public, and we see no pressing need to take the risks [associated] with the reduction in the balance sheet if the inflation numbers go down as we expect in the spring, ”the economist wrote.

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