The release of the U.S Federal Reserve’s Meeting Minutes yesterday spurred reactions and noise within the U.S equity sector.
U.S equity indices traded lower yesterday, as the Meeting Minutes publication from the U.S Federal Reserve created momentary shudders of nervousness within the broad financial markets. The Federal Reserve has made it clear that a further rate hike of 0.50% is being considered, as the institution tries to combat inflation, which many analysts fear has escaped the grasp of the U.S central bank.
The U.S Fed raised its key interest rate in March by 0.25% to a full federal funds rate of 0.50%. However, via the publishing of the Meeting Minutes yesterday, it is clear some of the central bankers sitting on the Fed committee were hoping for a more aggressive hike and were not pleased when the U.S central bank only raised rates by a quarter of a point.
Broadcasting Sentiment to Prepare Investors
The U.S Federal Reserve tries to be transparent with the financial markets as much as possible regarding their interest rate policy. The U.S government has a keen desire to make sure equity indices and the bonds market have insights regarding upcoming maneuvers from the Federal Reserve. A healthy U.S stock market keeps the U.S economy booming in several respects, and the ‘golden goose’ needs to be kept comfortable to produce gains and keep corporate America healthy.
The fact that the U.S central bank is actively engaging in talk regarding another move higher is no surprise. The Fed has made it known they could hike as many as five times during this calendar year to try and fight rising inflation. Rising consumer prices certainly caught the central bank by surprise much of last year. The next Federal Reserve meeting and announcement will be on the 4th of May 2022.
U.S Fed Considering a 0.50% Interest Rate Hike
The rhetoric coming from the Meeting Minutes yesterday seems a preparation psychologically for investment institutions to understand a larger interest rate hike in May is likely. It seems like a solid bet the Fed did not want to scare investors in March with an aggressive larger hike, but now that the groundwork has been set, a hike of 0.50% from the upcoming Fed meeting is on the cards. This would put the key fund rate at 1.00%, this is still historically low and the U.S central bank will have additional room to raise rates in the coming months if needed.
Markets Already Primed for Higher Rates
The fact that the U.S Fed has made its interest rate thinking public for all to hear, has largely been for the benefit of Wall Street and investment institutions like corporate banks. Traders should have no doubts that investment houses have reacted to what they perceive will happen from the U.S central bank already. While the recent selloff within the S&P 500 may in fact look bad to many short-term investors, the notion that the Fed will raise rates and let investment houses ‘know’ this is about to happen is actually meant to calms the market over the longer term.
S&P 500 Index 1 Month Price Chart
The downturn in stock prices over the past couple of days has been pointed to as a natural reaction to the fear that interest rates will go higher and that this will slow down the U.S economy just enough to curb inflation. The problem for the U.S Fed is that their actions may be too late, and that consumer prices which have been rising collectively as a reaction to coronavirus-induced supply and logistic problems, may be naturally about to fix themselves. Commodity prices are high, the war in Ukraine has not helped these issues, and large question marks remain, challenging assumed positive global economic and political conditions. Higher coronavirus infection rates in China now will also have an effect.
NASDAQ 100 Index 1 Month Price Chart
What Does This Mean for Traders?
The latest U.S Fed Minutes indicate that investors should be ready for a more aggressive hike in early May from the Federal Reserve. Short term nervousness may continue to trickle into the U.S stock markets and bond markets, because of the unease being caused by the U.S central bank as it tries to confront a dynamic economic and political landscape. It seems abundantly clear the Federal Reserve will have to be agile moving forward.
If the Fed raises interest rates by another 0.50% in May, this may prove to be enough for a while. An aggressive hike in early May could let the U.S central bank then react to inflation data from the CPI – Consumer Price Index – and other sources to then see what should be done next. The fact that the U.S Federal Reserve has made its intentions rather clear about interest rates in the short term will continue to affect U.S equity indices and bonds. Speculators need to be ready for dynamic and volatile conditions which will certainly develop.