Markets jittery after Fed minutes show hawkish discussion

Yahoo Finance’s Brian Cheung discusses the Fed’s outlook for 2022 and how markets are reacting to inflation expectations and forthcoming rate hikes.

Video Transcript

ZACK GUZMAN: But first want to get things kicked off here with a look at what we learned from the minutes yesterday and what it meant for what the Fed has planned for 2022, as it sent some shockwaves through the market, as we did see the odds of investors seeing those rate hikes as soon as March. They shot higher right after we got this. For more on that, I want to bring on Yahoo Finance's Fed reporter Brian Cheung, who's taking a closer look at that for us today. Brian.

BRIAN CHEUNG: Hey, Zack. Well, we saw the market jitters that happened yesterday at 2:00 PM after the Fed released minutes from its December meeting, detailing just how hawkish a lot of these policymaking officials really were headed into that meeting, especially with these inflationary fears kind of coming about. And the minutes kind of detailed how there was a couple of that 18-member committee that was worried about an unanchoring of inflation expectations. And this is kind of in line with the high inflationary prints that we had seen headed into that mid-December meeting.

But on the other hand, the debate very much still open about whether or not inflation expectations were starting to run away. A few said that they felt that things were still well anchored, so you're starting to see this debate on the FOMC committee with regards to really how worried are they about inflation possibly continuing to run hot through 2022. Now all of this is in vogue because of the Fed's handling of its balance sheet program. We know that it's almost $9 trillion in terms of the Fed's holdings of assets.

But several felt that the Fed could do a faster balance sheet runoff once the tapering process is wrapped up in mid-March. Again, this refers to the slowing down of Fed purchases. But balance sheet runoff means when can the Fed start to actively shrink its balance sheet. And again, some Fed officials say that maybe they can be a bit more aggressive than they were post-2008 financial crisis in allowing the balance sheet to get smaller. But of course, don't expect any balance sheet anywhere close to the likely sub $4 trillion level that we had seen prior to 2008.

Now all of this is also within the context of when will we see interest rate hikes. And again, we have to flashback to the dot plot projections, which we had gotten in December, where none of the 18 members of the committee see the case for holding interest rates at near zero, where they are right now, through the remainder of 2022. And in fact, Evercore ISI noting that the hawkish Fed December minutes point to a March hike. And even one of the more dovish members, Minneapolis Fed president Neel Kashkari, has been on the record lately, saying that he could see two interest rate hikes this year.

Now of course, a lot of this commentary was already spouted by the Fed chairman in the press conference in mid-December, but it seems like the market reaction yesterday kind of just reiterates how the Fed maybe has to say things twice to get a message across to markets. I kind of compare it to when your mom says, hey, it's time for dinner. You kind of say, eh, I don't even know if it's really true right now. But it's when she says it a second time that you're like, OK, wait, I think she might be for real here. So maybe that's kind of one interpretation of the Fed minutes on a lag basis getting the message across to markets, guys.

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