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The Fed just unleashed a big, hawkish signal to market

 There’s a lot in the minutes, with much useful information for students of the economy and monetary policy. You can find the full version here.


This commits the central bank to nothing, but the notion that there were hawks on the committee who thought that the Fed should reduce the size of its balance sheet (in other words, start to sell off its huge bond holdings in a move that, all else being equal, should raise yields) came as an unpleasant surprise.

John Authers Bloomberg January 6, 2022


Yesterday, Points of Return declared that: “Real earnings yields never stay this low for long. This implies that soon enough, either earnings yields will rise (and share prices fall), or inflation will increase.” 

This is of course wrong, by 180 degrees. What I meant was that either inflation would decrease, or share prices would soon have to fall. I’m flattered that so many of you spotted the mistake, and that all the various readers to bring it to my attention were polite about it.

John Authers 7 January 2022

It was in this column on Wednesday morning that we quoted George Saravelos, global head of currency research at Deutsche Bank, warning the market should be more focused on the Federal Reserve’s balance sheet, and how quickly it decides to unwind it, than the central bank’s forecasts on interest rates.

Minutes from the December Federal Open Market Committee, released later in the day, proved that warning correct

“Fundamentals didn’t keep a ceiling on these stocks when they were rising, and fundamentals won’t put a floor on these stocks when they’re falling. When high multiple stocks are being liquidated, it’s best just to stay away,” he said.

Wait, forever?

“If you’re going to put on a full position, whatever that is for you, you have two choices. Either give the position a tight leash, say 10-15%, or whatever you’re comfortable with. Or, give yourself multiple years for this thing to bounce back. Not months. Years. And understand that it might never come back,” he said.

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