The Week in Review: January 10, 2022
The Fed Sharpens Its Axe
Last year’s jubilance was met with uncertainty after the Federal Reserve signaled it may take a more aggressive stance to slow inflation. An outsized loss in the tech-heavy NASDAQ highlighted that faster-growing tech stocks are more susceptible to selling if the Fed moves to raise rates at a faster pace.
On Wednesday, the Fed released the minutes from its December meeting, which reflected a more hawkish tone than many investors had expected. Before we touch on the high points, let’s acknowledge that talk about the minutes is usually left to economists. It’s a wonky topic. But it influenced action last week.
That said, the minutes are simply a discussion among central bankers about the economy and a possible path of future policy. It’s a signal, but it’s not set in concrete.
Key points from the minutes:
A hike in the fed funds rate may occur “sooner or at a faster pace than participants had earlier anticipated.” In other words, investors took this as a sign that the Fed could raise the fed funds rate as soon as March, when its bond-buying program is scheduled to end.
Last month, May or June seemed more likely. In addition, we could see four ¼% rate hikes this year instead of three, which was projected at the December meeting.
A key gauge from the CME Group suggests as much: up to four rate hikes starting in March.
2. What surprised most investors was a remark that the Fed may be preparing to reduce some of the assets it loaded up on when the pandemic began. Buying bonds injects cash into the financial system. Letting maturing bonds run off without replacing them removes cash.
I recognize that any talk about the Fed’s asset mix is also detailed and wonky, but bear with me, as it affected trading last week.
Prior to the 2008 financial crisis, assets held by the Fed were primarily short-term T-bills. During and after the crisis, the Fed began what was popularly called QE, or quantitative easing—the purchase of longer-term Treasury bonds and mortgage-backed securities.
We saw a gradual runoff that began in 2018 and ended in 2019. But the pandemic encouraged new buying, and assets more than doubled to almost $9 trillion.
Last month, the Fed had high-level talks about allowing maturing bonds to run off its balance sheet without replacing them. Such a policy shift would help address inflation.
No time frame was forthcoming, but there were comments in the minutes that it might begin soon after any liftoff in rates.
Taking cash out of the financial system would be a more aggressive response. And shorter-term investors responded by sending most stocks lower.
Additionally, we saw a jump in Treasury bond yields last week—see the table of returns above. Despite high inflation last year, yields had remained surprisingly calm.
Yet, as the market attempts to find a new normal, today’s growing economy remains a tailwind for stocks, helping to cushion last week’s decline.
If you have any questions or concerns, please don’t hesitate to let me know.
Two for the Road
In 1930, economist John Maynard Keynes predicted that due to productivity increases through technological advancements, the American workweek would shrink to just 15 hours by 2030. Decades later, a 1965 Senate committee said, “Nah, sooner,” and predicted that we would be toiling just 14 hours a week by the year 2000. —Morning Brew, December 26, 2021
A village in Whales, United Kingdom, lost its broadband at 7:00 am every morning. The problem continued for 18 months until engineers discovered that a resident was turning on an old television at that time each morning and that signal was interfering with the broadband connection for the village. —BBC, September 22, 2020
This commentary reflects the personal opinions, viewpoints and analyses of the Stordahl Capital Management, Inc. employees providing such comments, and should not be regarded as a description of advisory services provided by Stordahl Capital Management, Inc. or performance returns of any Stordahl Capital Management, Inc. Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this piece constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Accessing websites through links directs you away from our website. Stordahl Capital Management is not responsible for errors or omissions in the material on third party websites and does not necessarily approve of or endorse the information provided. Users who gain access to third party websites may be subject to the copyright and other restrictions on use imposed by those providers and assume responsibility and risk from the use of those websites. Please note that trading instructions through email, fax or voicemail will not be taken. Your identity and timely retrieval of instructions cannot be guaranteed. Stordahl Capital Management, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.