FOMC Minutes released yesterday reveal an extremely hawkish Fed. So should you buy or sell US stocks in light of faster monetary tightening from the Fed?
This week's main event for financial markets was the FOMC Minutes, released yesterday. The minutes show what the discussions were three weeks ago when the Fed announced the first rate hike in what appears to be the start of a new tightening cycle.
As such, traders focused on finding out what the FOMC members discussed in a quest to find out the next Fed's moves. As it turned out, the minutes were extremely hawkish, much more than the market expected, thus, triggering fears that the stock market might tumble.
Fed sees robust economic growth
The first thing that drew attention at yesterday's release was the FOMC members' view that the economy is robust and the labor market is strong. Of course, this justifies further rate hikes, but a strong economy also supports the stock market, so equity investors may interpret it either way.
Many Fed members favor 50bp rate hikes
Many Fed members spoke in the three weeks that followed the FOMC Statement. Most of them were hawkish, citing upside inflation risks from the Ukraine war and COVID lockdowns in China.
To combat rising inflation, the Fed needs to do more than just hike the funds rate by 25bp. After all, inflation reached 7.9% in March, and if we deduct the 0.25% rate hike, the real inflation rate remains elevated.
Therefore, many Fed members favor a 50bp rate hike at ongoing meetings. The market will have a glimpse into the Fed's intentions at the next meeting scheduled in May.
In any case, more rate hikes and an increasingly hawkish Fed are negative for the stock market.
Quantitative tightening comes in May
Finally, quantitative tightening will be announced in May. The balance sheet roll-off of $95 billion/month will further weigh on stocks, at least if we interpret what the quantitative easing's effect was on the market.
During quantitative easing, stocks advanced. Logically, the opposite should happen during quantitative tightening, or at least the stocks will have a hard time advancing.
However, the truth is that we don't know what the effect of quantitative tightening will be. The explanation is that we do not have a precedent to compare with and interpret, as the last time the Fed started a similar program, it was forced to shut it down due to the COVID-19 pandemic.
All in all, investors in the stock market should be cautious because the Fed is more than hawkish. Historically speaking, stocks had a hard time advancing whenever that was the case.