The major US stock indices made a downward correction in the first two weeks of the year. The Nasdaq had the deepest correction compared with the two rounds of declines in late 2021. Yesterday, all key stock indices rebounded a bit though all of them are still carrying on with the correction. The highlight of the day was Jerome Powell's testimony at the Senate. Importantly, President Joe Biden nominated Mr. Powell for a second term as the Federal Reserve's Chairman. The next step is to wait for the approval from the Senate. Jerome Powell delivered his speech exactly before voting among the Senators. The Fed's leader reiterated that the regulator's dual mandate remains the same. The prime goals are the robust labor market and its full recovery in the wake of the COVID crisis as well as steady inflation at the 2% target level annually. There is no information on how the Senators responded to the inflation issue because consumer prices had already reached incredible highs. Today the US inflation data for December is on investors' radars. The CPI is expected to climb to 7% or even higher on year in the final month of 2021. Recently, Powell was slammed for neglecting high inflation and his unwillingness to admit that was not temporary. Nevertheless, most experts reckon that the Senators will vote for Jerome Powell's nomination.
Back to soaring inflation, there is no doubt that we will see its further acceleration today. Most experts think that consumer inflation might slow down at least in the second half of 2022. The thing is that the higher inflation grows, the more aggressive counter-measures the Fed will take. In this context, at the first policy meeting in late January, the central bank could make a decision to cut the QE program tapering by another $30 billion per month. On top of that, the Fed might venture into the first rate hike in March – April. When this actually happens, the stock indices will remain under pressure. For the time being, the fundamental background has not changed dramatically for stock investors because the stimulus program is still going on despite recent cuts in bond buying.
In other words, the Federal Reserve is still injecting cash into financial markets, albeit at lower volumes. However, the regulator could begin reducing its own balance sheet this year, selling Treasuries and mortgage-backed securities. This move will decrease demand for risky stocks. All in all, from my viewpoint, we should consider the prospects of the stock market in the following way. The question is how long and deep correction on Wall Street will be in 2022. We guess that there is a correlation between the degree of actual monetary tightening and a plunge in stocks. This is especially relevant for the time when the Federal Reserve will raise interest rates and will begin reducing its balance sheet.
