Stock Markets Decline, Dollar Strengthens as Fed Reveals Aggressive Stance Toward Inflation in March Minutes

Federal Reserve Chairman Jerome Powell testifies before the Senate Banking Committee hearing, on Capitol Hill in Washington, on March 3, 2022. Tom Williams/Pool Photo via AP

Stocks declined and the U.S. dollar rose following the release of Fed’s March minutes that reinforced market views on the policymakers’ hawkish stance in a bid to curb decades-high inflation.

The benchmark S&P started its decline on April 5 after opening at around 4,567.88 and closing over 0.9 percent lower at 4,525.02 mostly on fears of an aggressive Fed policy, which were justified the following day. Shares opened lower on April 6 at 4,493.91, which then fell more than 0.64 percent in early morning trade to end the day, slightly higher from the bottom, at 4,481.16.

Tech-heavy Nasdaq declined more than 2 percent from Monday’s closing at 14204.68 to end Wednesday at 13,888.83. Tech companies are especially affected by the aggressive interest rate hikes hinted at by the Federal Reserve.

“The market’s reaction to the Fed minutes is a very rational one. You know, the Fed is now telling you we’re going to pull a lot of liquidity out of financial markets in the next 12–24 months, and we’re going to keep pulling liquidity out of financial markets until we get what we want to see on the inflationary front,” said analyst Michael Jones, CEO of Caravel Concepts, according to Reuters.

“The Nasdaq’s going down almost three times what the Dow is because most of the pain of a tightening Fed would be where most of the gain was over the last two years. And that’s in those pricey megacap growth technology stocks.”

The U.S. Dollar Index traded at 99.6446, as of 4:25 a.m. EDT, a rise of 0.86 percent from April 5’s low of 98.7919, almost reaching a 2-year high against the basket of international currencies. The Fed’s take on inflation and suggestions for restricting the monetary policy have buoyed up the currency.

Federal Reserve policymakers “generally agreed” to shrink the bank’s balance sheet by about $95 billion on a monthly basis, resulting in significant decrease of liquidity in the markets.

“In their discussion, all participants agreed that elevated inflation and tight labor market conditions warranted commencement of balance sheet runoff at a coming meeting, with a faster pace of decline in securities holdings than over the 2017–19 period,” according to Fed minutes released April 6.

Pandemic-era near-zero policy rates would be “expeditiously” pushed towards a more “neutral posture,” which is around 2.4 percent, as concerns deepen regarding the broadening of inflation across the economy.

Although the 25-basis-points March hike was tempered by the war in Ukraine, Fed officials are prepared to raise rates by half-percentage-point increments in upcoming meetings to attempt to curb inflation.

The Dow Jones Industrial Average dropped 0.42 percent from closing at 34,641.54 on April 5 to end April 6 at 34,496.52.

With corporate earnings around the corner, April has historically been one of the better months for stock markets. The benchmark U.S. 10-year Treasury is currently at 2.61 percent, the highest since March 2019, and rising 7.85 percent over the weekend.