In previous articles, we have already said that the Fed last month embarked on a path of gradual tightening of monetary policy. Most members of the monetary committee and experts believe that in the next 2-3 years, the key rate will be raised to 3% on average. They also believe that 2 to 3 rate increases will follow next year. This is exactly the scenario the stock market was prepared for. What did he assume? He assumed that the monetary stimulus program would be reduced by $15 billion per month and would be fully completed in June next year. After that, the Fed will start raising the key rate. The tightening will be as gradual as possible. However, the latest inflation data forced Jerome Powell to change his mind about the interpretation of current inflation. It should also be remembered here that about half of the monetary committee has been declaring the need for faster tightening for several months in a row. At first, they spoke in favor of an earlier curtailment of QE, now they speak in favor of a faster curtailment of QE. Thus, investors could simply be unprepared for such a scenario. Indeed, the head of the Fed has been saying for months that a strong price increase is a temporary phenomenon, and when inflation has reached 30-year highs, he suddenly declares that no, this is not a temporary phenomenon.
Yesterday, it became known that the chairman of the Federal Reserve Bank of New York, John Williams, also holds the opinion on the need for faster rejection of QE. He wrote about this in an article in the New York Times. He said that the Fed will abandon asset purchases more quickly; that the new strain of omicron could worsen supply problems and increase inflation; that if a new wave of infections follows, the US economy could suffer greatly, and the labor market could slow down in its recovery. He also noted that it is still too early to conclude the new strain since it has just appeared. Nevertheless, market participants could understand that another member of the monetary committee is radical. Already in December, the Fed may decide to increase the pace of QE curtailment. Against this background, it will be especially interesting to look at the next inflation report (for November). After all, it will show whether the Fed's strategy works against accelerating price growth? In November, for the first time in a long time, the Fed reduced the volume of asset purchases by $ 15 billion. If inflation does not react to this change in any way, then the probability of a new, larger reduction in the volume of purchases will become even higher. And stock markets and bitcoin in this case can continue their decline. As we can see, at the end of 2021, investors are gradually returning to reality. We are forced to do this.
