📮Pika World FOMC Minutes Update

Instead of the usual morning update for tomorrow, Pika World will run through the quick insights of the latest FOMC deliberation with you.

🧨A Disaster of Pain

The Fed appears to be discussing stepping the pedal on monetary tightening based on the Fed minutes. Naturally, the market was fast to react as major indices dived sharply. More importantly, what is new is the desire to shrink the balance sheet sooner than anticipated potentially. Market participants for the past months didn’t digest this. 

💡The Path Ahead

While the Fed is still adding liquidity into the market at a slower pace, it is expected to finish the easing operation by March 2022. What is to come is the potential to raise the Fed funds rate by a quarter-point on 16 March. 

This is on the backdrop of a brighter labour market outlook, and thus attention is not focused on fighting inflation. As the Fed has been a significant provider of liquidity in the market thus far, it has helped inflate asset prices for the past years, and investors are worried that such excess is coming to an end. 

The logical escape was to sell off risky assets, and that’s the working on Wednesday. 

📉Interest rate hike Vs Balance sheet reduction

The FOMC minutes reflect the debate and implication of reducing the balance sheet compared to an interest rate hike. Reducing the asset holding by the Fed is a slow process. The Fed needs to stop re-investing any principal and interest payment from its portfolio, which is sufficient to slim down its holding. 

The committee appears to be discussing that using the balance sheet method rather than solely on rate hikes can help steepen the yield curve, which economists prefer. 

✈️Our Outlook

Pika World now sees risk on small caps and growth stocks unless we see mellow inflation that can give reasons for the Fed to tone down its monetary tightening process. We have taken steps to take losses on some of our holdings. Nonetheless, our recent opportunistic play of Russell had caused a big hole in our portfolio gain, and we will be working to shore up our capital and tide through a challenging 2022. 

It has been a roller-coaster week, and Pika World wishes all friends a safe landing!

Cheers, 

Pika Nat.