Stocks Plunge After Fed Minutes Show Central Bank Could Remove More Stimulus

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Topline

The stock market tanked on Wednesday after minutes from the Federal Reserve’s most recent meeting showed that the central bank could become more aggressive about removing stimulus and reducing its balance sheet as it looks to combat high levels of inflation.

Federal Reserve Chairman Jerome Powell.

Andrew Harnik/ASSOCIATED PRESS

Key Facts

The Dow Jones Industrial Average fell 1%, nearly 400 points, while the S&P 500 plunged 1.9% and the Nasdaq Composite 3.3%.

Stocks plummeted from their highs of the day as investors assessed the minutes of the Federal Reserve’s policy meeting last month—with the central bank already having said it would finish tapering its bond purchases by March and raise interest rates shortly after.

In the latest minutes, the Federal Reserve signaled that it could become even more aggressive about removing stimulus and raising interest rates later this year, depending on how the economic recovery progresses.

Investors were particularly spooked by the fact that Fed officials widely agreed that it would be appropriate to start reducing the central bank’s nearly $9 trillion balance sheet some time after the first interest rate hike.

Strong payrolls data had initially boosted markets earlier in the day, after ADP’s December employment report showed 807,000 jobs added last month—well above the 375,000 expected by economists.

Shares of chipmakers and software companies led the market’s declines on Tuesday: Salesforce fell nearly 8%, Adobe 7%, Nvidia 5% and Advanced Micro Devices 5%.

Key Background:

While markets largely began 2022 on a high note thanks to abating concerns around the Covid omicron variant, the sharp drop on Wednesday is a sign of more volatility ahead. While Fed officials believe robust economic growth will continue into 2022, they did admit that the emergence of omicron has made the economic outlook more uncertain. With high inflation still lingering, investors will watch closely as the Federal Reserve wraps up its pandemic-era stimulus program in the next few months and begins raising interest rates.

Crucial Quote:

“We believe the Fed is likely to raise interest rates quicker and potentially shrinking their balance sheet sooner than many expect as they signal fighting inflation is more important than protecting against a drop in economic activity,” says Chris Zaccarelli, chief investment officer for Independent Advisor Alliance. “What is harder to forecast is what level of market selloff they are willing to tolerate before changing course.”

What To Watch For:

Though the minutes from the Fed’s latest meeting were “hawkish,” markets should not be “terribly surprised,” according to Vital Knowledge founder Adam Crisafulli. “Stimulus is being drained, and high-multiple stocks will be vulnerable,” he predicts.