The Fed is hitting with the Hammer

The Fed is hitting with the Hammer

Twenty-five basis points, 50 basis points, 100 basis points? The Federal Reserve is all over the place with its sudden and unstable decisions. This shows the level of pressure the economy in the United States is passing through.

Yes, unemployment claims dropped from 171,000 to 166,000 for March 2021, which shows fewer people filing for unemployment insurance. However, behind these shady figures, we have a country suffering from multiple aspects, whether economically or politically.

 

After the last FOMC press conference, investors finally started to price in the possible 50 bps increase in the Fed rate and even the possibility of another 50 bps increase in the meeting following the upcoming one.

Alongside that decision, they decided to start reducing the USD9Trio. Balance sheet by approximately USD95Bio/month. Such a decision will tackle the increases in inflation rates, given that the method of reducing will be through offloading treasury securities at a high pace.

 

Indirectly, this means that less liquidity will be available in the economy for producers and consumers. In simple economic language, consumers will be forced to reduce their purchases while also witnessing an increase in the cost of borrowing due to the increases in the Fed rate.

 

Less spending means less activity for corporations, which means less revenue, leading to decreases in the Net Income. With that being said, this might indeed reduce inflation rates and overall consumer prices. Still, on the other hand, this also means that the profits and valuations of U.S. companies might be subject to decreases. Leading to possible increases in unemployment rates and the possible conversion from a high inflation status to deflation status.

 

This is being witnessed currently in the markets, especially in the Technology industry. To observe this effect, let’s take a look at figure 1.