International Communique No. 320 – 11th of January 2022


The release of Fed minutes from its last policy meeting of 2021 garnered the main news, as indications that monetary tightening could be faster and more significant than expected. The surge in inflation to 6.8% in November, coupled with the state of the labour market, is encouraging Fed members to envisage action that is slightly more forceful.

On the menu for 2022 is expectation of the Fed wrapping up asset purchases as early as March. A rise in the benchmark policy rate, which could occur as early as March too, with three rate hikes projected for the year is also something to look forward to. More surprising are possible plans to slim down the Fed’s balance sheet, which has mushroomed over the past decade in response to the multiple doses of quantitative easing administered.

Based on latest figures, this has swelled to USD 8.7 trillion, on a par with the GDPs of France, Germany and Italy combined. This novel element fuelled an upswing in the 10-year US government bond yield to a technically critical 1.79%. Equity markets were taken aback and hit by a sudden bout of sector rotation, with richly valued growth stocks losing out to value stocks, trading on much lower multiples. The entire financials sector also welcomed the news by chalking up strong performances.

Concerning the pandemic, the WHO confirmed that the new Omicron variant had now reached every continent but stated that symptoms are less severe compared to previous variants. While this is obviously good news from a healthcare perspective, the rate at which its spreads and contaminates individuals outpaces any of its predecessors. This has resulted in swathes of people going missing from their workplaces, with no sign of an end to this tendency.

Early indications as to the economic impact of quarantine-related absenteeism point to a decline in spending in the US restaurant and hotel sector and frequent labour shortages in industries in which working from home is not feasible. GDP for the first quarter of 2022 could be impacted negatively.

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