December 1, 2022

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A broad decline on Wall Street after minutes from the US Federal Reserve

A broad decline on Wall Street after minutes from the US Federal Reserve

On Wednesday night Norwegian time, the US Federal Reserve released the minutes of its December meeting. The report states, among other things, that the Fed became increasingly concerned about high inflation at the end of last year, At the same time as the announcement of higher interest rates and a faster reduction of the much discussed support purchases.

After the minutes became known, the mood among the leading US indexes on Wall Street worsened.

If high inflation continued, many Fed members were concerned that the central bank would be forced to take a “backlash,” the meeting minutes said. Some members of the interest rate committee imagine that the Fed may have to raise interest rates “earlier or at a faster pace” to keep pace with high inflation.

It also states that the committee discussed the Fed’s balance sheet, which has more than doubled since the beginning of 2020. According to the minutes, members discussed opportunities to start reducing the central bank’s balance after the first rate hike.

Nordea interest rate and credit strategist Lars Moland believes the Fed meeting minutes indicate that the central bank will start raising interest rates soon.

– In general, it looks like it will start with a rate hike as soon as possible, probably in March, he says and continues:

They also discussed starting to reduce the balance sheet, i.e. net selling of bonds, if not for a long time.

The central bank’s balance sheet has risen sharply as a result of the Federal Reserve’s purchase of securities throughout the Corona pandemic. The reduction in the balance sheet will be part of the Fed’s plan to normalize monetary policy. Downsizing could mean that the Fed reduces its monthly reinvestment.

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The minutes also make it clear that the so-called “point scheme”, that is, the interest scheme, for the members of the committee indicates that interest rates can be raised three times in the next year, three times in 2023 and two more times in 2024.

The Federal Reserve has turned 180 degrees.

Moland points out that the tone of communication from the Federal Reserve has completely changed since the beginning of 2021.

Lars Moland, Head of Credit at Nordea.

Lars Moland, Head of Credit at Nordea. (Photo: Peter Berntsen)

– At the beginning of last year, the Fed was very hesitant and said that it would not do anything about monetary policy and also insisted that inflation is temporary. Since then, the Fed has turned 180 degrees, Moland says.

The head of interest rates and credit indicates that the US Federal Reserve is now very interested in raising long-term interest rates. At the same time, he is convinced that if the Fed wants it, it has the means to raise interest rates.

– I’m sure if the Fed wants to raise long-term interest rates, it will, he says.

Moland points to the government bond sale as an opportunity.

The Fed may want long-term interest rates to rise now. One way to do this is to stop buying long bonds. At the same time, the Fed has bought and owned a lot of bonds, so what it can do is start selling them.

Heavy fall on Wall Street

All major US indices ended Wednesday with significant declines:

  • The Standard & Poor’s 500 overall index fell 1.94 per cent.
  • The Dow Jones Industrial Average fell 1.07 percent.
  • The Nasdaq Composite Index, which is dominated by technology companies, fell 3.34 percent.

Thus, the Nasdaq recorded its worst day since February 2021, the Financial Times reports.

At the same time that the three major indices fell sharply in the wake of the minutes’ publication, the interest rate on US government debt also rose with another ten years due.

The ten-year-old, as he is often referred to, is Wednesday night Norwegian time with just over 1.7 percent, up from about 1.3 percent just a month ago. This is the highest interest rate since May 2021.

Bad news for growth companies

An increase in long-term interest rates is often negative for so-called growth companies, which are companies that are priced based on future earnings. Therefore, the technology-based Nasdaq index often fluctuates in line with interest rates because many technology companies are considered growth companies.

On Wednesday, several prominent growth stocks fell. Tesla shares fell 5.35 percent, Apple fell 2.7 percent and Alphabet, which owns Google, fell 4 percent.

In addition, Meta, the new name for Facebook, and Microsoft dropped by more than three percent.(Conditions)Copyright Dagens Næringsliv AS and/or our suppliers. We would like you to share our cases using a link that leads directly to our pages. All or part of the Content may not be copied or otherwise used with written permission or as permitted by law. For additional terms look here.