How does the minutes of the Federal Reserve sting the nerves of the market?

On January 5, the US stock market fell after the Federal Reserve released the minutes of its December meeting.$S&P 500(.SPX)$$NASDAQ(.IXIC)$$DJIA(.DJI)$

The core issues are two:Raise interest rates and reduce the table.

If you haven't understood these two concepts before (skip them if you do)-

Raising interest rate, as its name implies, means that raising the benchmark interest rate in the United States means raising the benchmark interest rate in the market, thus raising the borrowing cost of commercial banks and further forcing the interest rate in the market to increase, which is one of the most basic monetary policies. Its purposes include reducing money supply, suppressing consumption, suppressing inflation, encouraging deposits, slowing down market speculation and so on.
The "table" in the reduced table refers to the "balance sheet" of the Federal Reserve. Although the Federal Reserve is the "central bank" of the United States, it is a private institution. If we think of it as a company, the Fed also has a "balance sheet". The Fed's balance sheet still includes assets and liabilities, although it should not be understood in the way of an ordinary company like AAPL. The action of reducing the statement means that the Fed will reduce its assets (and liabilities).

These two actions are remarkableReduce the money supply in the market and reduce liquidity.

This time, the US stock market led the global stock market to pee

In fact, the minutes of the Federal Reserve do not throw out every word and stalk of the meeting. In fact, it is a very purposeful supplement to the parts that the Fed did not express the complete meaning after the December meeting, or the market interpretation was too optimistic/pessimistic.Supplementary information specially sent by the Federal Reserve to the market.

For example, at the December meeting, the Fed's understanding of Omicron virus was obviously not as comprehensive as it is now. Even if the Fed can speculate on the possible measures of the US government, it cannot expect other countries to do and respond. The reaction of other countries will affect another important factor-the supply chain, which is the factor that really pushes up inflation in the United States.

For another example, the Fed's description of inflation until December has always been "temporary". Whether it's showing mercy to Biden administration or really lagging behind these old-fashioned messages, this expression transmission is "wrong and lagging". Therefore, the Fed is eager to delete the original "temporary" expression and instill more radical expectations in the market to express "error correction".

What we can be sure of now is that-

First, the minutes of the December meeting we saw,Far more eagle than Fed Chairman Powell's statement after the meeting at that time. When the market plummets, it is to "repair the expectations that have not been expressed in place". Including:

  • The pace of raising interest rates will be faster than expected at the previous meeting.
  • Raising interest rates may follow the scale reduction.

Of course, raising interest rates will have a greater impact on technology stocks, which we have done inArticles in September and OctoberAs mentioned in, the rapid rise of inflation will hit the large-scale technology stocks and growth stocks even harder.

Second, compared with raising interest rates, what the stock market is more afraid of is actually shrinking the table! Shrink the watch! Shrink the watch!

First of all, why should the Fed shrink its table? Let's look at the changes in the Fed's balance sheet first:

< img src= "https://static.tigerbbs.com/3c6599b8389daebd752b274543fd2df4" tg-width= "990" tg-height= "793" width= "100%" height= "auto" >

Obviously, this wave of "table expansion" after 2020 has directly increased from the previous level of 4 trillion US dollars to the current level of 8 trillion US dollars. The degree of water release can be imagined.

Raising interest rates has a comprehensive impact on the economy, while shrinking the table will affect market changes to a greater extent, such as the stock market. In 2018, the Federal Reserve shrank its table, and the S&P 500 index honestly became the biggest year of retracement since the financial crisis in 2008.

The Fed has a large proportion of US Treasury bonds on its balance sheet.Once you want to reduce the table, you must sell the national debt and recover the money from the market againTherefore, it will reduce the liquidity of the market. Financial institutions should adjust their risk exposure and liquidity accordingly, which will also reduce the proportion of risky assets (such as stocks), so the impact on the stock market is very direct.

At the same time, the faster "shrinking table" expectation enhances the "signal effect". At present, when the lower limit of zero interest rate is zero, the role of "expanding the table" will be "significantly enhanced", while when the interest rate is much higher than zero, the role of expanding the table is not obvious.

This concept appeared in St. Louis Fed Chairman Brad's 2019 research report "When Quantitative Austerity is Not Austerity". Simply understood, it is a kind of "expected management" (pre-judgment) of the market. Obviously, this prediction of the stock market is more obvious.

Why did the Fed go to such pains to warn the market?

It must be trying to throw the pot-don't blame us for not reminding you!

Of course, the Fed sees the risks.

First, its inflation target has been achieved, and the current monetary policy is to catch up with inflation and accelerate the "normalization of monetary policy".

In fact, it also shows that the Federal Reserve is not a "prophet" organization, but more adapting to market changes. Moreover, with the rapid transmission of information today, these antiques may be more and more slow to receive feedback from the market. More than expected inflation in 2021 alone is enough for them to raise a few pots.

Second, political pressure affects their speeches

When the Democratic Party is in power, it often has to open and close its funds. Since Powell is working for the Biden administration, he naturally has to take care of their face. As it happens, the current finance minister is Yellen, the former chairman of the Federal Reserve, and Powell and Yellen have worked together for so long, and many policies are connected and more convenient to ventilate. Therefore, many attitudes of Yellen also express some helplessness of the Federal Reserve.

For example, Yellen has repeatedly shouted "tariff reduction" recently, the main purpose of which is to alleviate the price increase caused by logistics problems, supply shortage and rising demand.

Because the Fed does not have many tools at hand, and without the assistance of fiscal policy, many monetary policies will be greatly reduced.

A final tip

First, the liquidity of the market will definitely decrease, and the tightening of liquidity will definitely not be better than that in 2018!

Second, at present, almost no fund manager in the market has experienced the economic cycle of raising interest rates completely, which means that everyone does not know what happens when raising interest rates.

The current market is dominated by quantification, and everyone's actions are surprisingly consistent, which can also explain why the deflation was so fast in the late January 5th.

Therefore, the situation we are facing now may be brand-new in the past 10 years.

voteWill the Fed's "shrinking table" affect your stock yield this year?(Single choice)
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Disclaimer: The above content represents only the personal views of the poster and does not constitute investment advice on this platform.

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Comment23

  • BlackjackA
    ·01-10
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  • haoyasun
    ·01-10

    Shrinking the table makes the market panic more than raising interest rates and reducing QE

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  • Nice sharing
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  • The Fed does things every day
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  • Good
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  • 麻绳
    ·01-07
    🙌
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  • This article is good, please forward it to everyone

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  • Read
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  • The stock market comes out with money to buy bitcoin
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  • Great article, it would be better to attach a few risk-resistant stocks at the end of the article.
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  • As the global economic engine, if the US stock market collapses, it is estimated that the rest of the stock market will not look good.
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  • The buffalo brought by the epidemic ended briskly, and the buffalo should really converge.
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  • I'm worried about the profound impact on our country after the US interest rate hike and scale reduction.
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  • Powell should be more caring for the market now, and let out the wind in advance, so that the possibility of later collapse is relatively small.
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  • At present, the market is indeed a bit like a chicken flying and a dog jumping. The original culprit is to shrink the table and raise interest rates.
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  • Isn't there a similar situation last year, that is, 2021? Not so pessimistic.
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  • At present, almost no fund manager in the market has experienced the economic cycle of raising interest rates completely? It's arbitrary!
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  • After reading your article, there is a feeling of catastrophe. Is the power of raising interest rates and shrinking the table so great?
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    • skyteeth
      It's far worse than the epidemic
      01-11
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  • There is no tiger currency bad review
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  • The tightening of liquidity must not be better than in 2018, which sounds a little panic.
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