US stocks extended losses after the Fed minutes showed they are ready to deliver super-sized hikes and reduce its massive bond holdings at a maximum pace of USD 95 billion a month. Everyone knew the Fed was telegraphing the balance sheet reduction was coming and expectations were for the pace to be around USD 100 billion, so the USD 95 billion amount was initially viewed as dovish. The Fed noted that they preferred to deliver a half-point increase at the March meeting, but the uncertainty from Russia’s invasion of Ukraine prevented them.
The Fed is worried that elevated inflation had continued to broaden from goods into services and that could lead to keep the Fed aggressive later in the year. The minutes have traders worried that risk is greater that the Fed could remain vigilant in fighting.
Fed sends hawkish message to markets
Stocks have been under pressure recently following a wrath of hawkish Fed speak. Fed’s Brainard kicked it off this week by saying the Fed could begin the balance sheet runoff in May, which would happen at a faster pace than last time. Fed’s George said that a 50-basis point hike is an option they have to consider and that this accommodative policy has to be removed. Fed’s Daly also said the balance sheet reduction could start as early as May. Today, both Fed’s Harker and Barkin said they expect the shrinking of the balance sheet to start soon.
No one is doubting the Fed is committed to an aggressive start to this tightening cycle, but that might not necessarily lead to turmoil for stocks. On average, stocks can rally another 10 months after the 2s10s inversion and currently the economy could still have a couple or possibly a few strong quarters. Investors however won’t be aggressive buying these dips in stocks because no one knows will the Fed ease up tightening once growth concerns emerge in the middle of the year.
Treasury Secretary Yellen’s testimony to the House Financial Services Committee did not raise any concerns a change of the regulatory path would be happening. Yellen has not seen significant evasion through crypto so far. Yellen noted that crypto could be a tool to evade sanctions, but they do have a good deal of authority in this area. Adding that large-scale transactions would be apparent on the blockchain and that exchanges would be following AML procedures.
Bitcoin is trading like a risky asset, trading lower alongside equities as Treasury yields surge. Following the Fed’s minutes, Bitcoin extended declines after no dovish surprise emerged. The Fed’s gonna be aggressive here and that is going to be short-term trouble for risky assets like bitcoin. Bitcoin could see weakness towards the USD 40,000 level, with the USD 38,000 level providing major support.
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