FOMC meeting minutes unexpectedly talk about scale reduction. When will the turmoil in technology stocks stop?
On January 5, 2022, the Federal Reserve released the supplementary minutes of the FOMC meeting in December, which was different from the statement made in December. As soon as the minutes of the meeting were released, it caused an uproar, and technology stocks fell sharply, even the stock prices of the technology giants who have always been very stable could not bear it.$Microsoft(MSFT)$, Google,$Tesla Motors(TSLA)$,$NVIDIA Corp(NVDA)$Amazon and other stock prices have weakened collectively, and Google's stock price has fallen below 120 antennas for the first time in more than a year. The whole market is jittery and nervous. What happened? After the December meeting, Nasdaq took off directly and rose sharply, but yesterday's meeting minutes brought a chilling diving trend. After three weeks, what changes have taken place in the attitude of the Federal Reserve? The interpretation is as follows:
1. In the minutes of the meeting, besides discussing the normalization of monetary policy, taper and interest rate hike, it is very likely that the scale reduction will be accelerated, which exceeds the market expectations.
Most notably, participants said that the current economic outlook is much stronger than at the beginning of the last currency normalization event (which began to shrink the table in 2017), with higher inflation rate and tighter labor market.
The Fed's balance sheet, both in dollar terms and relative to nominal gross domestic product, is now much larger than it was at the end of 2014 when the third major asset purchase program ended. Participants pointed out that the weighted average maturity date of the Fed's Treasury holdings is shorter than that at the beginning of the last normalization event. Some delegations noted that, therefore, if the Committee followed its previous practice of phasing out reinvestments in maturing government bonds and principal payments to institutional MBS, the balance sheet could shrink faster than it did last time. However, some participants expressed concern about the vulnerability of the US Treasury bond market and how these vulnerabilities affect the appropriate pace of balance sheet normalization. Several participants pointed out that the strategic results framework could help alleviate such concerns. Participants also believe that the Fed is more suitable for normalization than in the past, because the adequate reserve framework and the current interest rate control tools of the Fed, including interest on reserve balances and the overnight reverse repurchase agreement (ON RRP) mechanism, are in place and working well. Some participants were of the view that a sharp reduction in the balance sheet might be appropriate in the normalization process, especially given the abundant liquidity in the money market and the higher utilization rate of the ON RRP instrument.
Participants discussed tentatively the appropriate conditions and timing for the start of balance sheet shrinkage as opposed to raising the federal funds rate from the ELB.In previous experience, the balance sheet shrinkage began nearly two years after the policy rate (the federal funds rate) was raised, when the normalization of the federal funds rate was considered to be in progress. Almost all participants agreed that it might be appropriate to start the balance sheet voting sometime after the first increase in the target range of the federal funds rate. However, participants judged that the appropriate timing of balance sheet accounts might be closer to the increase of policy interest rate than the previous experience of the Committee.They pointed out that the current situation includes stronger economic prospects, higher inflation and larger balance sheets, so it may be necessary to accelerate the pace of normalization of policy interest rates. They stressed that the decision to start the reduction will depend on the data.
Some participants commented that eliminating policy easing by relying more on balance sheet shrinkage and reducing the increase of policy interest rate may help limit the flattening of yield curve during policy normalization. Some of those participants were concerned that a relatively flat yield curve could adversely affect the spreads of some financial intermediaries, which could increase financial stability risks. However, several other participants, referring to staff analysis and past experience, noted that many factors affect long-term yields, making it difficult to judge how different policy combinations will affect the shape of the yield curve.
Many participants judged that the appropriate speed of balance sheet closing might be faster than during the last normalization period. Many participants also judged that a monthly cap on securities runoffs could help ensure that the pace of the runoffs is measurable and predictable, especially given the short weighted average duration of the Fed's Treasury holdings.
Participants discussed considerations regarding the long-term size of the balance sheet, which is consistent with the efficient and effective implementation of monetary policy under an adequate reserve system. Participants pointed out that the size of the balance sheet has been expanded, and the balance sheetAfter the normalization process begins, this scale may remain this scale for a period of time. Several participants noted that the ultimate level of reserves needed to implement monetary policy effectively was uncertain, as the potential demand for reserves by banks varied over time. Given this uncertainty and the Committee's past experience, several participants expressed a preference for allowing large cushions to support interest rate controls. It was noted that, as reserve levels declined, developments in the money markets needed to be carefully monitored in order to inform the Commission's eventual assessment of the appropriate level of the long-term balance sheet. Some participants were of the view that the SRF would help ensure interest rate control as the size of the balance sheet approaches its long-term level; Some participants noted that the SRF could facilitate a balance sheet runoff rather than something else. Some participants suggested that in the long run the establishment of the SRF could reduce the need for reserves suggesting that the long-term balance sheet might be smaller than otherwise.
Participants also discussed the composition of the Fed's asset holdings. Consistent with previous normalization principles, some participants said that in the long run, the Fed's asset holdings mainly consist of US Treasury bonds. In order to achieve such a composition, some participants tended to reinvest the principal of MBS institutions in national debt relatively quickly, or let MBS institutions run off the balance sheet faster than national debt.
2. The outlook for the economic situation is more optimistic. Controlling inflation is the primary goal of the Fed at present, and its attitude is more determined than that in December.
Information from a review of the December 14-15 meeting suggests that US real GDP growth rebounded in the fourth quarter after slowing in the third quarter. Labour market conditions continued to improve in October and November, with pay indicators rising sharply so far this year. Consumer-price inflation, as measured by 12-month percentage changes in the Consumer Expenditure Price Index (PCE), remained stubbornly high as of October.
In October and November, total non-farm payrolls rose steadily on average, but the average increase was lower than in recent quarters. The unemployment rate fell from 4.8% in September to 4.2% in November; Unemployment among African-Americans and Hispanics has also fallen sharply during that period, but both remain well above the national average. Both the labor force participation rate and the employed population ratio increased in November. Job vacancies in the private sector are still well above pre-pandemic levels, as measured by the Job Vacancies and Labour Mobility Survey. The four-week moving average of initial jobless claims for regular state unemployment insurance fell in early December, similar to pre-pandemic levels. Recent weekly estimates of private sector payroll estimates by Commission staff using data provided by payroll processor ADP indicate a further increase in private sector employment by early December. Average hourly wages rose 4.8% in the 12 months to November, and wage increases in most sectors have been considerable.
Inflation figures remain high and indicators suggest that inflationary pressures have increased in recent months. Total PCE price inflation was 5.0% in the 12 months to October, while core PCE price inflation (excluding changes in consumer energy prices and many consumer food prices) was 4.1% over the same period.
The average 12-month PCE inflation cut constructed by the Federal Reserve Bank of Dallas was 2.6% in October, up 0.6 percentage points from two months earlier. In November, the 12-month change in the consumer price index (CPI) was 6.8 pc, compared with core CPI inflation of 4.9 pc over the same period. Survey-based measures of medium-and long-term inflation expectations-including the University of Michigan Consumer Survey, the Federal Reserve Bank of New York Consumer Expectations Survey and the Professional Forecasters Survey-have leveled off after rising over the past year.
Real PCE growth appears to have picked up in the fourth quarter, despite an improvement in COVID-19 cases, weakening of previous fiscal stimulus measures, lingering supply bottlenecks and recent consumer price increases. In particular, real spending on retail goods rose steadily again in October, and spending on services strengthened. However, in November, the component of nominal retail sales data used to estimate PCE fell, possibly reflecting that some holiday sales have been brought forward to October.Light vehicle sales in October and November were below the third-quarter average as extremely low dealer inventory continued to limit sales.Housing demand remained strong, but the indicators of housing sector activity, including housing starts and housing sales, generally did not change much in October.The shortage of building materials seems to be hindering the completion of the building, and the land available for construction is limited.
The forthcoming data coincides with a rebound in foreign economic growth this quarter, largely due to the reopening of Asian economies after lockdowns earlier this year to curb a resurgence of COVID-19 cases. Strong growth in intra-Asian trade and solid PMI readings also provide some early signs that production bottlenecks in the region are easing. In contrast, the introduction of new public health restrictions in Europe in response to the new wave of COVID-19 infection seems to have inhibited economic activities in some European economies. Recently, the discovery and rapid spread of the Omicron variant has prompted many foreign economies to impose new international travel restrictions. Inflation abroad continues to rise, mainly due to the further increase in retail energy and food prices. In addition, the cost pressure caused by persistent bottlenecks in supply and transportation is reflected in purchasing managersThe input and output price components of the index reached a record high.
3. The more hawkish attitude pushed up the real interest rate, and the growth stocks were under collective pressure again.
The statement of shrinking the table caused the yield of US 10-year Treasury bonds to soar to over 1.7%, The upward real interest rate leads to collective pressure on growth stocks, Last night, even YYDS such as Google, Microsoft and NVIDIA were not spared. In the short term, raising interest rates and shrinking the table are not the core to reverse the trend of technology giants, but it is very likely that the short-term emotional downturn will bring about a killing valuation, and the market is likely to fluctuate greatly in the near future. After raising interest rates, the core technology leaders whose performance is still growing steadily are still the best investment direction in the market.
Disclaimer: The above content represents only the personal views of the poster and does not constitute investment advice on this platform.