🎙Beyond the Fed📍

Equity markets tried to struck off the overhang of an aggressive Fed in the final trading hours despite many hawkish comments for Bullard such that the current interest rate is too low by at least 3% raising the odds of a power charged rate hike in the coming meetings. 

As a new earnings season is arriving for tech stocks, Pika World will be focusing on that for clues on where the market might shift gear. 

🧨A less market-friendly Fed🗝

The FOMC minutes had given investors much to worry about. For one, the Fed is more hawkish than what market participants expect. It will have to work through the market to sell part of its $3 trillion mortgage-backed securities purchased during the pandemic. 

There is no concrete plan to reduce its $9 trillion pandemic and purchase, but substantial progress has been made towards such a plan. This hints at having it executed as early as the May FOMC meeting. 

On top of these woes is the openness to the idea by Fed officials of a 0.5% hike. The tight labour market adds uncertainty, with inflation data worsening significantly due to the recent oil shock. Consistent with our prior writing, workers’ paycheque is growing slower than the inflation growth.

📉Balance sheet reduction impact💊

Some strategists had pointed out that the tightening of the balance sheet tends to have a more profound impact than the rate increase in this episode. This is attributed to the vast Treasury and mortgage-backed securities (MBS)  that the Fed purchased during the onset of the pandemic. 

While there could be buyers for such MBS, most analysts believe it will not be a smooth process. The Fed’s pace of such reduction possibly depends on the economy’s trajectory and its implementation rate hike and quantitive tightening process. 

Moreover, the sector is about 1/5 of the GDP. As more people own homes than have significant exposure to the equity market, a wealth effect is strongly tied to real estate. A misstep by the Fed could spell trouble for the housing market and thus the broader economy.