Markets in Risk-off Regime Following Hawkish Fed
27 January 2022
Yesterday brought the main event of this week, and volatility was again highly elevated.
The Fed left monetary policy unchanged yesterday, as widely expected, but the following statement was of more importance and sounded hawkish.
In the statement, the Committee announced the final two reductions in the amount of their monthly asset purchases, bringing purchases to an end in “early March.” At the same time, the FOMC now expects that it will “soon be appropriate” to raise the fed funds rate - almost certainly happening at the next Fed meeting in March.
Additionally, governors updated the statement to note that inflation is “well above” the FOMC’s two percent target (previously described as “having exceeded 2 percent for some time”) and that the labor market is “strong,” dropping the judgment that the economy is short of full employment.
All risk assets declined notably after the FOMC decision - the Nasdaq 100 index erased its 4% daily gain, while other indices also fell sharply. Additionally, bonds cratered, sending their yields firmly higher - the 10-year yield jumped toward 1.9%, while the 2-year yield shot nearly 20% higher from 1.00% to 1.20%. Since the short-term yield rose much more than the 10-year yield, the yield curve flattened strongly, implying an economic slowdown in the future.
Both gold and silver cratered as yields surged higher. Silver fell from 24 USD to 23 USD today, while gold declined toward 1,810 USD.
In the FX, the greenback surged, pushing the EURUSD pair down to 1.12, testing last year's lows. If the euro falls below that level, large stop-losses could be hit, possibly pushing EURUSD toward the psychological level of 1.10.