⛳The Fed had Spoken, Once again⛳

🍟What we know

The Fed announced something along the lines of expectation. The interest rate is likely to rise in March, at the same time when the bond purchases will end. 

The balance sheet is also expected to shrink from a current $9 trillion level which has doubled since the onset of the pandemic. The figure is astonishing as it represents about 40% of the US GDP. 

🧸Early gains evaporating

As the QnA session continued, early gains were washed off as Uncle Powell spoke of his concern about inflation as economic growth started to turn milky. But, more importantly, he expressed that inflation appears to be more persistent and broad-based than earlier thought.

Initially, investors seem to be relieved that there is no surprise rate hike. There was no outright indication of a 0.5% rate increase coupled with little likelihood of normalisation balance sheet in the March FOMC meeting. 

📉4 rate hikes probability growing

The camp for a minimum of 4 rate hikes appears to be rising. The Fed did not address much on rate hike expectation, giving the market room for much imagination. Given that the Fed is perhaps behind the curve, there leaves little room to be dovish and that a more potent dose of medicine is probably what is needed to tame the roaring inflation. 

What is re-assuring is perhaps that the FOMC tend to convey balance sheet runoff earlier and more predictably to reduce anxiety in the market. Uncle Powell had also discussed that such a balance sheet shrinking exercise is probably in discussion over the next two meetings, which would kick the can down to March and May. 

💰In a nutshell

A less accommodative environment would mean we will have to avoid momentum trading and probably strip off some parts of our portfolio as we adjust to a new reality with taking a more considerable realised loss. But, on the other hand, this would help us navigate the stormy weather in a lighter boat. 

We hope all friends of Pika World have a prosperous trading week!

Cheers, 

Pika Nat.