What did the US FOMC say that made stock markets jittery?

Indian stock market benchmark indices fell 1.5% on Thursday, mirroring a similar decline in Asian equity markets and a steep fall overnight in the US markets, giving a knee-jerk reaction to the minutes of the US Federal Open Market Committee and its views on future interest rate increases.

The 30-share Sensex was trading around 59,323.10, down 900.05 points in the afternoon trade, while the Nifty 50 was at 17,664.80, down 260.45 points.

Losses were limited in the broader markets with the mid- and Small-cap indices each down 0.5%. Bank Nifty fell more than 1%. The BSE Realty index was the top loser (-2.3%). The BSE IT index was down 1.84%.

Overseas, the Nikkei 225 was down nearly 3% on Thursday, while Chinese and other Asian market indices all traded in various shades of red.

Overnight, the Dow Jones Industrial Average fell more than 1%, while Nasdaq declined over 3.3% amid panic selling as investors interpreted a more hawkish stance by the US Federal Reserve on future interest rate hikes as well as the quantum of bond purchases.

So, what did the US FOMC say in its December 14-15 meeting?

Inflation worries deepen

Last month, while the US Federal Reserve avoided any drastic changes to its measures, policymakers signalled three rate increases this year and three the following year as inflation concerns deepened.

After months of describing pricing pressures as “transitory,” the Fed dropped the term and spooked investors with new concerns just as a new variant of Covid-19 emerged. Fed Chairman Jerome Powell shifted his tone to emphasise the ongoing pandemic’s risks to inflation, via ongoing supply-chain issues, as opposed to growth.

Minutes from the meeting gave investors more context into officials’ latest discussions. Participants “generally noted that, given their individual outlooks for the economy, the labor market, and inflation, it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated,” the minutes say.

Bond tapering

Several participants, meanwhile, “viewed labor market conditions as already largely consistent with maximum employment.” Taken together, these comments suggest the first rate increase could come as soon as March.

The US Fed will also accelerate the tapering of its pandemic-era bond purchases. Fed officials began discussing ways to shrink its almost $9 trillion balance sheet, which ballooned by about $4 trillion since the start of the pandemic and represents roughly 40% of the US GDP.

How the Fed handles balance-sheet normalisation may be more consequential for markets than the timing and pace of rate increases, some economists say.