The Fed released the minutes from the FOMC meeting held on December 14–15, 2021. It shows the Feds are concerned about high inflation. To fight rising inflation, Fed officials now stand ready to accelerate the pace of its tapering program and intend to implement three rate hikes in 2022. Following the release of the minutes, futures on the federal funds rate is now pricing in an 80% chance of the first quarter-percentage-point Fed hike during the March 2022 FOMC meeting.
In the past few days, investors have redirected their attention from the Omicron variant toward the central bank’s hawkish monetary move and its potential impact on the economy. The pivot from the Fed has pushed bond yields higher, which in turn has weighed on stocks, especially technology-related companies, and high growth names whose future earnings become less attractive when compared with bonds with rising yields. Many professional money managers and asset allocators may be rebalancing their portfolios toward value-related assets to hedge against rising inflation.
It was an ugly day as US stocks suffered sharp sell-offs today right after the release of the Fed minutes. All three US indexes fell, with the SPX Index closing near the low of the day at 4,700.58, down 92.095 points or -1.94%. The Dow Jones Industrial Average succumbed to strong selling, falling to 36,407.11, a decline of 392.54 points or -1.07%. The Nasdaq Composite Index plummeted to 15,100.17, declining 522.54 points or -3.34%.
On the interest rate front, the 10-year Treasury yield has climbed to an intraday high of 1.705%, surpassing its Oct/Nov 2021 highs and threatening to retest the pivotal Mar 2021 reaction high at 1.765%.
All thirteen S&P Sectors also fell into the close, with the largest declines concentrated within S&P Real Estate (XLRE - 3.25%), Technology (XLK - 3.07%), Consumer Discretionary (XLY - 2.70%), and Communication Services (XLC -2.51%).
The past few days, investors have been reacting to the Fed’s hawkish tilt to raise interest rates sooner than anticipated and shrinking the Fed balance sheet, creating a more volatile market environment both at home and abroad. As the Fed and central banks move away from protecting against a drop in economic activities, yields have resumed their near-term bull rallies.
So, how high will rates rise in anticipation of higher inflation and less accommodative central banks' monetary policies?
Since interest rates are a leading indicator of economic trends and influential to stock market performances, we recommend investors monitor key benchmark interest rates.
Enclosed below are some of the key interest rates to monitor both in the US and overseas.