Oh Baby

Image source: Anna Malygina - Shutterstock

What's going on?

Get your bags ready: new details from the Federal Reserve’s December meeting suggest US interest rate hikes could arrive much sooner than expected.

What does this mean?

Back when the pandemic first started causing trouble, the Fed helped keep Americans afloat by lowering interest rates and making it cheaper to borrow money. But what goes down must come up, and investors have long been expecting the central bank to raise rates in 2022. Only thing is, the Fed’s newly released talking points now suggest this might happen a lot sooner than they thought (tweet this). As for why, the Fed reckons Omicron might well create even more supply shortages, making it all the more urgent that the central bank takes inflation-limiting measures – and fast.

Why should I care?

For markets: Bonds for sale.

Rate cuts weren’t the Fed’s only tool during the pandemic: the central bank also bought billions of dollars’ worth of bonds every month, pushing their prices up and their yields down, which in turn brought down the cost of borrowing. But it’s now emerged that the Fed is thinking about selling some of the massive amount it’s accumulated. That would push up the cost of borrowing for individuals and companies alike, which might be why the US stock market fell 2% after the news.

The bigger picture: It’s a bad time for tech.

Rising bond yields are a particular worry for fast-growing tech firms. See, investors value a stock based on what a company’s future profit is worth today, and that future profit is worth less when yields are on the rise. Problem is, the appeal of tech firms’ stocks mostly comes from the sheer potential of their future profits, and investors are less likely to buy in if they start to decline. Hedge funds have certainly been quick to jump ship: data from Goldman Sachs showed they just dumped more of their tech stocks in a four-day period than they have done in 10 years.

Originally posted as part of the Finimize daily email.

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