Fed officials weigh in on speeding up interest rate hikes to curb inflation, U.S. stocks and crypto markets generally fall

At 3 a.m. Beijing time on Thursday, the Federal Reserve announced the minutes of the December FOMC meeting. In addition to the market's expected acceleration of Taper and early interest rate hikes, the committee's discussions on reducing the balance sheet put pressure on risky assets again. After the announcement of the minutes, the U.S. stocks and crypto markets generally fell.

The minutes of the December meeting showed that the Fed may need to raise interest rates "earlier or faster" than officials initially expected, as it seeks to curb disturbingly high inflation and ensure a stable economic recovery. Officials fully agreed to reduce asset purchase plans more quickly in order to give the central bank more flexibility to raise interest rates next year.

According to the personal interest rate forecast chart released by the Federal Reserve after its December meeting, officials expect to raise interest rates three times next year, three more in 2023, and two more in 2024. The governor of the US Central Bank, Christopher Waller, later said that with the stimulus plan completely halted, the first rate hike may even take place as early as March.

In addition, since the meeting in mid-December, omicron has spread rapidly in the United States, and the challenge of the epidemic has escalated. Anna Wong, Bloomberg's chief economist in the United States, pointed out that the minutes of the meeting show that the Fed believes that the US economy is ready for a large-scale exit of monetary stimulus measures. Even the emergence of omicron is unlikely to slow them down. We believe that the probability of raising interest rates in March has risen sharply. We will pay close attention to the speeches of Fed officials before the January monetary policy meeting in order to dig out more clues.

Since the beginning of the epidemic, the United States has begun a series of bond purchase plans such as large-scale releases. This has also been a key factor in the rapid rise of U.S. stocks and the crypto market. At the same time, it also brought inflation. In Powell's recent speech, he believes that the risk of rising inflation has increased, and price increases are generally related to the disruption of the supply chain caused by the epidemic. Inflation may continue into next year, and the Fed will consider stopping the purchase of government bonds "possibly a few months in advance."

The minutes further confirmed that it should be a welcome news for the Fed to reduce the size of debt purchases more quickly. This gives the Fed more room for manipulation 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 substantially adjust their interest rate expectations, which may trigger market turbulence.

At present, it seems that the news that the Fed is more aggressively reducing the scale of bond purchases has promoted the decline of the Standard & Poor's 500 Index. 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 US$43,000, falling by more than 7% in 24 hours. Although Bitcoin is widely touted by the crypto community as a safe haven, it is also an emerging technology that is sensitive to monetary policy tightening. For the crypto market, out of concerns about the Fed’s policy, the market shows obvious volatility.

Stephane Ouelette, CEO and co-founder of FRNT Financial, a cryptocurrency platform, said that despite long-term trends around inflation and value preservation, the subconscious reaction of cryptocurrencies tends to treat them as purely risky assets.

Some crypto analysts also pointed out that higher interest rates often lead to intense industry rotation, as investors dump risky assets such as cryptocurrencies and turn to safer bets such as value stocks.