Following the minutes from the Federal Open Market Committee meeting in December, the stock market dropped substantially on Wednesday afternoon.
According to Jerome Powell, Federal Reserve Chairman, the Federal Reserve may begin allowing its balance sheet to shrink sooner than market participants had anticipated.
The purchase of the FED’s securities adds liquidity to the financial system and vice versa. The central bank is still buying Treasury and agency mortgage-backed securities at a lesser rate and is expected to stop buying bonds in March.
According to the CME Fedwatch site, once that happens, the FED is projected to begin raising its federal funds to target on March 16, with futures market pricing in a one-quarter-point increase.
Inflation is the most severe economic issue, pushed by both supply limits and demand fuelled by economic stimulus, notably the FED’s balance sheet doubling.
Extra liquidity has also driven up asset prices. The prospect of a withdrawal of some of that excess shook the riskier markets on January 5, 2022.
We can infer from the FOMC minutes is that the central bank may lean less on interest rate hikes and more on balance sheet reductions, as the FED will not reinvest the principal and interest payments from its portfolio.
“Some of the committee members felt that consolidating financial conditions by relying more on balance sheet runoff and less on rate hikes would help consolidate the financial position. The curve is, in his opinion, a desirable outcome. However, it is not clear whether this was a widely shared view,” JPMorgan chief US economist Michael Feroli wrote in a client note. In addition, he noted that “some” FOMC participants favoured rapid runoff in the central bank’s mortgage-securities holdings relative to Treasury holdings.
FOMC minutes also have an effect on the price of Bitcoin. According to the general prediction, the Bitcoin price will likely drop to around $38k, and then it maybe has a chance to rebound.
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