US stocks lower after Fed minutes point to tighter monetary policy

US stocks were lower on Wednesday afternoon after minutes from the latest Federal Reserve meeting highlighted officials’ willingness to aggressively raise interest rates to combat inflation.

The US central bank raised its benchmark interest rate by 0.25 percentage points last month, but the minutes showed several participants would have preferred a sharper 0.5 percentage point increase were it not for the uncertainty caused by Russia’s invasion of Ukraine. “Many” of them said at least one 0.5 percentage point increase would be appropriate later in the year.

The minutes also showed officials refining plans to start shedding assets from the Fed’s balance sheet at a much faster pace than its previous effort in 2017. Lael Brainard, a Fed governor, on Tuesday said the central bank could rapidly reduce its $9tn balance sheet from May.

The S&P 500 stock index was 1.1 per cent lower, while the tech-dominated Nasdaq Composite index fell 2.1 per cent, after paring steeper losses made immediately after the minutes were published.

The declines followed what had already been a bruising day for investors in Europe and Asia. The Europe-wide Stoxx 600 index dropped 1.5 per cent, its worst daily decline in almost a month, while Hong Kong’s Hang Seng index dropped 1.9 per cent and Japan’s Topix fell 1.3 per cent.

Government debt also came under pressure, with the yield on the benchmark 10-year US Treasury note adding 0.06 percentage points to 2.61 per cent, as German and Italian yields also climbed. Government bond yields, which underpin the rates banks charge companies and households for loans, rise as prices fall.

Investors are grappling with a difficult combination of rising inflation in the US and Europe, conflict in Ukraine and an escalating coronavirus outbreak in China. On Wednesday, the US and British governments both toughened sanctions against Russian banks in response to atrocities committed by Russian forces.

“There are many things to worry about,” said Maarten Geerdink, head of European equities at NN Investment Partners, “But the one thing that matters the most is that we had a very accommodative Federal Reserve and we now have one that is on the tightening side.” 

Juliette Cohen, strategist at CPR Asset Management, said: “By removing these asset purchases and selling bonds that are on the balance sheet, it says we don’t need so much [monetary] accommodation due to the high level of inflation and reinforces the idea they will be hiking interest rates.

“We expect a more rapid monetary tightening, not only in the US but also in the eurozone,” she added, after the annual pace of inflation in the currency bloc hit a record high of 7.5 per cent in March.

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