The Federal Reserve is worried about inflation and looking to ‘crush’ stock market valuations to tame general increases in the price level. Minutes released from the institution’s Federal Open Market Committee suggest that conventional stockholders could be in for a rough ride, with shares falling 20 percent or more by 2023, according to some analysts.
What Did The Fed Say?
Policymakers are currently trying to tamp down massive inflation caused by COVID-19-related shocks, new credit creation, and supply chain issues.
To do this, the Fed has agreed that it will begin shrinking its balance sheet at a rate of $95 billion per month, with around two-thirds of that coming from Treasury securities and the remaining third from mortgage-backed securities.
While there was no formal vote on policy direction, committee members appeared to jointly concur with the measures, according to the minutes.
The meeting suggested that the Fed was behind the curve in fighting inflation and that the central bank had underestimated the scale of the problem.
Perhaps a little late, it is now looking to put the cat back in the bag.
Unemployment Hits Record Lows
Despite all the turbulence in markets and supply chain issues, employment is strong.
The U.S. economy added 431,000 new jobs in March, bringing the unemployment rate down to 3.6 percent, roughly where it was before the COVID-19 pandemic.
Given the Fed’s dual mandate of full employment and low inflation, it seems highly likely that the central bank will now increase its efforts to fight the latter.
Sensing this, market participants sold off all the major indexes on Monday and Tuesday this week, with more losses likely to follow.
What This Means For Traders
Given the likely trajectory that the Fed will take, traders may consider shorting major markets, particularly those dominated by companies that rely on consumer discretionary spending, such as the NASDAQ.
It is likely that stocks will be flat, or even in negative territory, over the coming quarter, unless the Fed decides to change direction.
Given soaring labour costs, though, that is unlikely to happen. The Fed will want to take some of the air out of capital markets to tame inflation for ordinary, non-capital-owning consumers.