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Stock markets are taking a tumble today after America’s central bank revealed it could raise interest rates sooner or faster than expected, to tame US inflation.
The minutes of the Federal Reserve’s December meeting, released last night, shows that Fed officials were concerned about America’s “elevated levels of inflation”, and considering normalising monetary policy faster to combat rising prices.
In a hawkish turn, the Fed minutes say:
Participants generally noted that, given their individual outlooks for the economy, the labor market, and inflation, it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated.
Officials pointed to America’s “increasingly tight labor market”, and the jump in prices which they attributed to supply and demand imbalances and the reopening of the economy. US inflation hit 6.8% in December, its highest since 1982.
Some policymakers also argued the Fed could stat to cut the size of its balance sheet “relatively soon” after beginning to raise the federal funds rate. It’s currently on track to end its pandemic stimulus bond-buying programme in March.
The minutes spooked Wall Street, sending the tech-focused Nasdaq Composite down by over 3% in its biggest one-day drop since February.
A strong US jobs report (US companies added 807,000 employees in December) also fuelled expectations that the Fed could normalise policy faster.
Ipek Ozkardeskaya, senior analyst at Swissquote, explains:
Yesterday has been a deep red day for the US equities, as the FOMC minutes hinted at earlier and a faster rate normalization path, and the reduction of the Fed’s balance sheet soon after the first rate hike. The extra hawkish element hammered the sentiment sending the US yields higher and the equities lower. The better-than-expected ADP data certainly gave an extra support to the Fed hawks.
The ADP data revealed that the US economy added more 800K new private jobs in December, twice the 400K expected by analysts, and as strong as the figures we used to see at the heart of the post-pandemic recovery last year. But helas, the strong data added to the hawkish Fed expectations, as it reinforced the Fed’s view that the US economy is close to a full employment and it’s time to move on.
We are now stepping into a period where good data is bad as it fuels the Fed hawks, and bad data is bad, as well, because it can’t fuel the Fed doves.
Asia-Pacific markets have followed Wall Street’s lead, with Japan’s Nikkei sliding 2.9%.
Britain’s FTSE 100 index is down over 1% in the futures market, while European stock futures have dropped nearly 2%.
There’s a flurry of economic data ahead, which will show how the UK service sector, car dealers and eurozone builders fared last month as the omicron wave hit. We also get the latest US jobless claims report.
- 8.30am GMT: Eurozone construction PMI report for December
- 9am GMT: UK car sales for December
- 9.30am GMT: UK service sector PMI report for December
- 9.30am GMT: ONS publishes weekly economic activity and business insights report
- 1pm GMT: German inflation rate for December
- 1.30pm GMT: US weekly jobless claims
- 1.30pm GMT: US trade report
- 3pm GMT: US factory orders
Read More: Omicron pulls UK service sector growth down to 10-month low – business live