Fed brings down Wall Street by announcing rapid tightening of monetary conditions

Has the American central bank (Fed) become (again) a “hawk”, in favor of a strict monetary policy to control inflation? This is what now believes Wall Street, which was panicked Wednesday January 5: the Nasdaq, rich in technology, fell 3.34%, while the S&P 500 index, representative of large American companies, lost 1.94%. Two-year rates, which generally reflect expectations of rate hikes, hit 0.83%, a record since March 2020, when the pandemic broke out.

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In question, the publication of the “minutes” of the Fed, the report of its last meeting, in mid-December 2021, which augurs a more important and faster tightening of monetary conditions to counter inflation, which reached 6, 8% over one year in November 2021. On the Federal Reserve’s program for 2022: by March, the end of purchases of treasury bills, which artificially kept long-term interest rates low to boost the economy; the possible increase in interest rates as of March; and, surprise, the reduction in the central bank’s balance sheet – in short, instead of injecting liquidity into the economy, the Fed could withdraw it.

Investors thought the US central bank was forever a ‘dove’, a supporter of easy money to boost growth and jobs

For months, operators did not take seriously the institution chaired by Jerome Powell. By dint of keeping its short-term key rates at zero since the start of the Covid-19 pandemic, by dint of buying treasury bills without limits, investors thought that the American central bank was for eternity a ” dove ”, a supporter of easy money to boost growth and jobs. At its meeting in mid-December 2021, the Fed had already indicated that it would increase its interest rates three times in 2022. The dove was turning into a hawk, but the financial markets did not want to see it. , finding these measures hardly worrying: the party could continue on Wall Street. Until Wednesday January 5.

For weeks now, small technology stocks, overvalued on the stock market, have been particularly affected: they generally do not make short-term profits, and a rise in interest rates reduces the value of their hypothetical dividends. But on Wednesday, the tide turned, giant caps also fell, whether technological (Google lost 4.7%, while Microsoft and Facebook were down 3.6%) or more traditional (Goldman Sachs, – 2.2%, Nike, -2.5%). On the other hand, ultra-defensive stocks, with guaranteed turnover and profits in times of inflation and / or slowdown, ended up on the rise, such as Coca-Cola, Caterpillar (construction equipment), Procter & Gamble or Walgreens (pharmacy ).

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