Inflation worries: America's Federal Reserve is causing interest rate fears among investors

After a good start to the new year, the stock markets have come under pressure.

The Dax fell on Thursday by 1.7 percent to 15,993 points.

On Wednesday the Dow Jones index for standard values ​​had already lost 1.1 percent to 36,407 points on the New York stock exchanges.

On the technology exchange Nasdaq, the composite index had fallen by 3.3 percent.

In the early business on Thursday, the American stock exchanges showed little change.

Markus Frühauf

Editor in business.

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Winand von Petersdorff-Campen

Business correspondent in Washington.

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The price losses were triggered by the publication of the minutes from the December meeting ("Minutes") of the US Federal Reserve (Fed) on Wednesday evening.

This gave investors the impression that the Fed could tighten its monetary policy more quickly than previously assumed.

For the first time in a long time, the central bankers also discussed the need to reduce the bond portfolio faster than previously calculated.

As part of its quantitative easing program, the Fed had increased its bond portfolio to just under $ 8.8 trillion.

So far it has only been clear that the central bankers want to let the bond purchase program expire by March.

A reduction could also result in the Fed selling bonds and drawing liquidity out of the markets.

Inflation could be more persistent

Higher inflation rates than the central bankers expected had prompted them to reassess the economic situation. They pointed out that economic growth was greater and the labor market stronger than expected, while inflation was proving to be more persistent. "It may be necessary to raise the key interest rate earlier or faster than previously thought," it says literally in the minutes. The PCE, the inflation indicator preferred by central bankers, excluding energy and food, showed an increase of 4.7 percent in November compared to November 2020. It was thus faster than in the previous months.

After the Fed meeting in December and the subsequent statements by the Fed and Federal Reserve Chairman Jerome Powell, the Fed analysts had anticipated that the bond purchase program would expire in March and then the key rate hikes, which at the moment are still in the range between 0 and 0.25 percent persist. The central bankers themselves expect up to three key rate hikes this year. Some believe it is possible that a significant shrinkage of the bond portfolio may be necessary after the first rate hike, according to the Minutes. At the meeting in mid-December, the central bankers already had the occurrence of the new Coronavirus variant Omikron in view, but without having a good picture of the infection process.

Yields rose significantly on the bond markets.

The yield on ten-year US government bonds was 1.75 percent on Thursday, 0.1 percentage points higher than on Wednesday.

At the beginning of December it was still quoted at 1.35 percent.

Since then, the yield on ten-year Bunds has risen at a similarly steep rate, albeit from a significantly lower and negative level.

At the beginning of December this had fallen to minus 0.388 percent.

Rapid increase in returns

On Thursday, at minus 0.037 percent, it approached the zero percent mark that was last reached in March 2019. On the bond market, rising yields mean falling prices. Deutsche Bank analyst Jim Reid recalled that only three days before Christmas Eve the yield on ten-year government bonds was minus 0.36 percent. This shows how quickly the mood on the bond market has recently turned towards the expectation of rapidly rising interest rates.

In contrast to the Fed, the European Central Bank (ECB) is still pursuing a comparatively expansionary course and is ruling out an interest rate hike in the coming year. But she too wants to cut back on bond purchases and has to watch out for further inflationary developments. There is still no sign of easing after the inflation rate in Germany rose again in December to 5.3 percent after 5.2 percent in November. Economists had previously expected a fall in inflation in a twelve-month comparison.

DWS economist Ulrike Kastens sees the peak in inflation in the euro zone in December. But consumers would have to wait for real, noticeable relief. Not only the high oil price, but above all the drastic rise in gas and electricity prices at the beginning of the current year would leave consumers with the feeling that everything has become very expensive, according to the economist from the Deutsche Bank fund company.

For Commerzbank analyst Rainer Guntermann, the Fed minutes underline the risks for the markets in view of the positive inflation and growth developments and the fact that the Fed is considering a faster turnaround in interest rates and an earlier reduction in its balance sheet. That puts a strain on US government bonds and also on investor risk sentiment. Their greater caution reflects the price losses on the stock markets. For the Commerzbank analysts, an interest rate hike as early as March moves into the market focus.

DZ Bank analyst Birgit Henseler also spoke of a surprisingly aggressive view of the Fed's monetary politicians.

Some of them not only demanded rapid increases in key interest rates, but also an early reduction in the central bank balance sheet.

In view of the supply chain problem, which will not relax anytime soon, the DZ Bank analyst believes that the risks for persistently high inflation rates are enormous.

However, bank stocks have benefited from the expectation of rising interest rates.

The European Stoxx banking index beat the general market trend.

Deutsche Bank's share price rose by up to 3.4 percent.