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US Stocks Retreat As Fed Plans to Reduce Balance Sheet

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US stocks retreated yesterday as the Federal Reserve indicated a more hawkish attitude to combat inflation and high prices.

The US central bank hinted at cutting back its support for the economy as it tackles runaway inflation.

RELATED: Federal Reserve To Hike Interest Rates 3 Times in 2022

US Stocks Retreat As Fed Reserve Hints At Taking Aggressive Action

US USD one dollar banknotes with a technical analysis chart of financial instruments | US Stocks Retreat

As a result, a majority of US stocks retreated into declines in light of a global sell-off. Nasdaq futures went down by 0.27% as technology stocks bore the brunt of the sell-off.

Dow Jones futures as well as those from the S&P 500 rose, but only cautiously by 0.24% and 0.06%. 

The Fed’s December meeting minutes suggest that they plan to take a more aggressive approach.

Instead of the earlier plan to gradually taper its bond purchases, the central bank will now reduce its balance sheet. This points to a move to cut the amount of liquidity in the market.  

Simon Harvey, a senior FX market analyst at Monex Europe, said that the move came as a surprise.  “The most notable development in the minutes undoubtedly came in the form of the Fed’s view on balance sheet reduction,” he said. Earlier in December, the US central bank said it would double the pace of tapering while cutting interest rates. 

US Stocks Retreat, Other Global Stocks Follow

As a result, stocks all over the world began to retreat. Nasdaq posted the biggest loss in the US, registering a 3% drop, which is its biggest in nearly a year.

The drop follows a two-week rally where the S&P 500 closed 5% higher to register an all-time high last Monday. Elsewhere around the globe, other stocks followed the drop.

London’s FTSE 100 lost 0.4%. Meanwhile, the Euro Stoxx 600 went down 0.9%. In addition, Frankfurt’s DAX fell 0.9%. Asian stocks followed US stocks as well, dampening gains in some indices.

China’s Shanghai Composite fell 0.2%, while Tokyo’s Nikkei dropped 2.8%. Meanwhile, Hong Kong’s Hang Seng added a cautious 0.7%.

The Fed effect moved quickly. 10- year US Treasury yield rates rose to 1.73% yesterday. This is its highest rate since April 2021. Previously, Treasury rates surged to $1.71 after the Fed disclosed its meeting minutes.  

Fed Won’t Wait Anymore

Now, the question becomes how soon will the Federal Reserve schedule its first interest rate hike for 2022. Analysts from ING say that March might be too early for a rate increase, given the current Omicron surge.

However, the month of May might be it. The ING brain trust also noted that the US achieved its employment target even as full economic recovery might seem hazy.

Jobs data will determine whether the Fed’s decision will be on time and on target. So far, experts forecast that the December jobs will remain within or exceed expectations.  

The Fed’s newly-adopted hawkish attitude strikes a contrast against the early market calm typical in January. A tight job market and high inflation rates mean that the agency won’t wait for workers to get back to work. Instead, it will execute its plan to raise interest rates as soon as possible. 

Watch the CNBC Television reporting on what investors need to know about the Fed’s December meeting minutes:

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