Hawkish FOMC Minutes Spook Markets and Maul High Duration Equities, All Eyes On Powell Confirmation Testimony

Jay Powell has been a very dovish Fed chief and has taken great pains to prepare for investors for the Fed’s every move. This week though, the discussions of the FOMC at their December meeting spooked markets and raised the prospect of a more Old Testament style Fed that gets mailed 2x 4x’s in protest from construction workers claiming they no longer need their lumber since no one is buying houses. Markets became worried this week that an inner-Volcker may be stirring deep within Jay Powell and his FOMC.

The Federal Reserve minutes came out on Wednesday and resulted in a pretty significant market sell-off particularly in longer duration equities like Technology. The minutes showed that in addition to asset tapering and rate lift-off, the FOMC is now considering shrinking the size of its balance sheet. Markets did not like the more hawkish tone of the minutes and the prospects of a more aggressive Federal Reserve than many investors seemed prepared for. The committee also discussed raising rates as soon as March.

The Federal Reserve’s balance sheet has expanded to just under $9 trillion, the highest level in history. Previous efforts at shrinking the balance sheet didn’t even come close to getting it to pre-financial crisis levels, and it has obviously grown signifi...

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