(NovaPoint) The equity markets struggled the first week of the new year after the minutes from the December Federal Reserve meeting indicated the Fed could potentially accelerate its actions to slow bond buying, raise short-term rates, and shrink its balance sheet.
In the quarterly summary of economic projections released in December, the Federal Reserve laid out a good road map for its actions for 2022. It would accelerate the tapering of the monthly bond buying program and have the program completed by the end of the first quarter of the year. It would also raise short-term interest rates three times at 0.25% each. This is a normalization of the previous accommodative policy put in place in the early days of the pandemic.
Then the minutes of the December Federal Reserve meeting indicated Fed officials could accelerate its actions even further. Not only would it complete the taper and start raising short-term interest rates as soon as March, but it would also start unwinding its $8.8 trillion balance sheet. Much of the treasury bonds and mortgage-backed securities on the Fed balance sheet have been accumulated during the pandemic.
This swifter call to action caused interest rates to increase. The ten-year treasury bond ended the week at a yield of 1.766%, up from 1.512% the week prior.
The Fed appears to be responding more to the problematic inflation trends than its other focus of full-employment. As mentioned above, job growth has underperformed expectations the past two months. We will likely learn more in a few weeks following the January 25th—26th Federal Reserve meeting.
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