The Federal Reserve, the US’s policy-setting central bank, will hike interest rates in 2022. Analysts for Goldman Sachs predict the Fed will hike rates as early as March and again in June, September, and December. Experts mostly agree that this is the right move to curtail the US’s runaway inflation. However, it’s still causing havoc for high-risk assets and growth stocks.
“We believe Fed officials are coming to the same conclusion that the labor market is very tight, making it a tough sell to hold off on the first hike until June, our prior call,” writes Goldman Sachs chief US economist Michael Feroli. Deutsche Bank announced Friday that its analysts also foresee four interest rate hikes in 2022.
Market experts predict that the Fed will begin to shrink its eye-watering $8.8 trillion balance sheet after raising interest rates once or twice this year. The central bank’s loose financial policy from March 2020 has maintained high volumes of liquid capital in the economy. However, it’s also led to rising production costs, unprecedented labor market tightness, and rampant inflation.
December Jobs Report
The Labor Department released its December jobs report on Friday, indicating that hiring slowed inexplicably during the otherwise busy holiday season. On the other hand, unemployment fell to pre-2020 lows, an encouraging sign for the recovering economy. Experts expected the report to include more optimistic numbers for December, though.
“It’s a solid report. Obviously, it didn’t hit what the experts had said … but when you look at 2021 as a combined total, as the president has been sworn into office, passed the American Rescue Plan, 6.4 million jobs have been added, which is a record,” Marty Walsh, the U.S. Secretary of Labor, explained to reporters.
“There’s no question that we still have people out of work, we have people that have left the workforce. We’re working on also inflation. So, we do have some work to move forward.”
The tight labor market and shifting Fed policy have investors rethinking risky investments like cryptocurrency, palladium, and tech stocks. Market analysts predict that 2022 will be a tricky year for long-term investments.
Last Wednesday, the Fed released the minutes from its December policy-setting meeting. During that meeting, the central bank discussed the need for swift action in the US economy to curb inflation. The bank’s strategy will involve hiking interest rates and slowing its bond-purchasing program, reducing the volume of liquid capital sloshing around the market.
This policy shift is good news for the average worker but bad news for growth stock investors. Higher treasury bond yields correlate directly with lower growth stock valuations. After the Fed published the minutes last Wednesday, shares of tech companies like Apple and Tesla took nosedives. Investors are uninterested in taking risks without the Fed pouring money into the economy. Instead, they’re more interested in safe investments like energy.
The sell-off isn’t limited to tech stocks, either. Stakeholders are fleeing commodities like palladium, too. Palladium is a platinum-group metal commonly used in catalytic converters and delicate electronics. Its price often drops when tech stocks lose value. Meanwhile, some shareholders are selling out of their gold positions, assuming that the shifting Fed policy will curtail inflation and reduce the value of commodities.
“The reduction in liquidity from the Fed will cause both the equity risk premium and interest rates to rise, which will continue to disproportionately impact the riskiest assets in the market including momentum-driven investments in money-losing technology stocks, meme stocks, and particularly cryptocurrencies, which have no intrinsic value,” says Infrastructure Capital Advisors portfolio manager Jay Hatfield.
Bitcoin Bubble Popping?
Bitcoin’s fifty-day moving average is about to dip under its two hundred-day moving average. Market analysts call this chart pattern the “death cross,” as it indicates when an asset is in price free-fall over a consistent period.
Bitcoin has dropped by 40% since it posted its all-time high price on November 10. Much of that damage has taken place in the past week, with the digital coin sinking 12% in only seven days. Bitcoin is trading around $40,865 Monday morning, its lowest price since September 2021. Crypto enthusiasts are all asking one question: why?
The Fed’s decision to hike interest rates is probably part of the issue for cryptocurrencies like Bitcoin. Many investors treat crypto like a tech stock, a long-term investment that will pay off over a multi-year timetable. In Bitcoin’s case, some stakeholders might be selling out for the same reason that investors are fleeing gold.
Bitcoin has been called “digital gold” because of its supposed resistance to inflation. The standard has a fixed number of tokens in circulation, so the coins’ value can theoretically only go up as demand increases. In the absence of inflation, however, short-term investors might be uninterested in holding Bitcoin for other uses. Is crypto’s time up? For some analysts, it looks like the bubble is finally popping.