Fed officials weigh faster rate hikes to curb inflation; U.S. stocks and crypto markets fall across the board

At 3:00 a.m. Beijing time on Thursday, the Federal Reserve released the minutes of the December FOMC meeting. In addition to the market's expected acceleration of taper and early rate hikes, the committee members' discussion on reducing the balance sheet put pressure on risk assets again. After the minutes were released, U.S. stocks and crypto markets fell across the board.

The minutes of the December meeting showed the Fed may need to raise interest rates "sooner or at a faster pace" than officials initially expected as it tries to curb uncomfortably high inflation and ensure a steady economic recovery. Officials fully agreed to tapering the asset purchase program more quickly to give the central bank more flexibility to raise interest rates next year.

According to the dot plot of individual rate projections released by the Fed after its December meeting, officials expect three rate hikes next year, three more in 2023 and two more in 2024. Christopher Waller, president of the U.S. central bank, later said the first rate hike could even come as early as March as the stimulus program is fully stopped.

In addition, since the mid-December meeting, omicron has spread rapidly in the United States, and the epidemic challenge has escalated. Anna Wong, chief economist of Bloomberg in the United States, pointed out that the minutes of the meeting showed that the Federal Reserve believed that the US economy was ready for a large-scale withdrawal of monetary stimulus measures, and even the emergence of omicron was unlikely to slow them down. We believe that the probability of a rate hike in March has increased significantly, and we will pay close attention to the speeches of Federal Reserve officials before the January monetary policy meeting to dig out more clues.

Since the beginning of the pandemic, the United States has launched a series of bond purchase programs, including a massive money-printing program, which has been a key factor in the rapid rise of the U.S. stock and crypto markets. At the same time, it has also brought inflation. In Powell's recent speech, he believed that the risk of rising inflation has increased, and the rise in prices is generally related to the supply chain disruption caused by the epidemic. Inflation may continue into next year, and the Federal Reserve will consider stopping the purchase of government bonds "possibly a few months earlier."

The minutes further confirmed that the bond purchases would be reduced more quickly, which should be welcome news to the Fed, as it provides the Fed with more room for maneuver and opens up the possibility of raising interest rates earlier if necessary. But this may mean that the market will face a difficult adjustment. At some point, investors will have to significantly adjust their interest rate expectations, which may cause market turmoil.

At present, it seems that the decline of the S&P 500 index has been driven by the information that the Federal Reserve is more actively reducing its bond purchases. At the same time, the crypto market has also fallen. As of press time, the price of Bitcoin in the crypto market is hovering around $43,000, down more than 7% in 24 hours. Although Bitcoin is widely touted as a safe haven by the crypto community, it is also an emerging technology that is sensitive to monetary policy tightening. For the crypto market, the market has shown significant volatility due to concerns about the Fed's policies.

Stephane Ouelette, CEO and co-founder of cryptocurrency platform FRNT Financial, said that despite long-term trends around inflation, hedging, etc., the knee-jerk reaction to cryptocurrencies is often to view them as pure risk assets.

Some crypto analysts also pointed out that higher interest rates tend to lead to dramatic industry rotation as investors sell risky assets such as cryptocurrencies and turn to safer bets such as value stocks.