April 10, 2024, marked a significant moment in the financial landscape of the United States, as the Federal Reserve (Fed) released its minutes from the March monetary policy meetingNotably, these minutes hinted at a likelihood of interest rate cuts by the end of the year, a stark shift from the monetary policies during previous years focused on tightening.

On the same day, the U.SConsumer Price Index (CPI) figures for March sparked widespread concern among investors, as the data exceeded expectations and led to a sharp downturn in the stock marketBy the end of trading, the Dow Jones Industrial Average fell by 1.09%, the Nasdaq by 0.84%, and the S&P 500 by 0.95%. This dramatic response reflects the market's sensitivity to inflationary pressures and interest rate expectations.

The Federal Reserve's Shift in Stance

The minutes from the Fed's meeting detailed the officials' perspectives regarding the current state of the U.S

economy, financial conditions, and potential future actions in monetary policyThere was a general consensus that the policy interest rate is likely at its peak in this cycle of tightening.

Almost all officials expressed that, should the economic outlook progress as anticipated, a reduction in interest rates could be appropriate sometime this yearHowever, they cautioned that the path to decreasing inflation might be uneven, emphasizing the complexities and uncertainties that lie ahead.

One prevalent concern amongst Fed officials is the persistence of inflationTheir discussions revealed uncertainties surrounding the durability of elevated inflation levelsThey noted that recent economic data has not instilled confidence that inflation would satisfactorily decline to the target rate of 2%.

Some officials have also warned that geopolitical risks could exacerbate supply chain bottlenecks or increase transportation costs, adding additional upward pressure on prices

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Such developments could not only inflict inflationary pressures but also impede overall economic growth.

Moreover, Fed officials voiced their concerns regarding structural headwinds faced by the U.Seconomy, including slowdowns in major Asian economies, adverse conditions in the U.Scommercial real estate market, and the potential resurgence of stress within the banking sector.

The minutes also indicated discussions from the previous month regarding the possible cessation of balance sheet reductionCurrently, the Fed is tapering its holdings of Treasury securities and mortgage-backed securities (MBS) at a rate that may reach $95 billion per month, a process widely recognized as quantitative tightening (QT).

Despite a majority viewpoint that the QT process is proceeding smoothly, officials exercised caution in further balance sheet contraction due to memories of market turbulence witnessed in 2019.

The minutes highlighted a general agreement among officials to consider reducing the pace of the balance sheet run-off by approximately half, favoring adjustments to Treasury sales over MBS to decelerate the taper.

Following the release of the minutes, Nick Timiraos, a journalist known for his insights into the Fed's proceedings, reported on his observations regarding the central bank's readiness to slow down the balance sheet contraction, referencing the potential downgrade of previous monthly expiration targets for U.S

Treasury securities.

Dramatic Falls in Stock Markets

On that same day, the U.Sstock markets witnessed significant declines across all major indices, with the Dow experiencing a peak drop of 1.49% before closing down 1.09%. The Nasdaq index and S&P 500 also closed lower by 0.84% and 0.95%, respectively.

Most large-cap tech stocks also faced downturns, including notable players such as Tesla and Intel, which fell by almost 3%. AMD dropped over 2%, while Apple, Microsoft, and Google saw mild declinesContrastingly, shares of Nvidia gained nearly 2%, with Amazon, Meta, and Netflix experiencing slight increases.

Major banks saw widespread declines, with UBS falling over 4%, while Bank of America and other notable institutions like Morgan Stanley and Goldman Sachs dropped significantly as well.

Most prominent Chinese stocks in the U.S

also faced downturnsNIO and Bilibili fell by over 2%, while other notable names like Baidu, Weibo, and Pinduoduo also faced minor declinesOnly a few, like Alibaba, showed any strength among the Chinese stocks.

The yield on U.STreasury bonds rose sharply as well, with the yield on 10-year notes surpassing the critical threshold of 4.5%, closing at 4.514%. The two-year yield, which is particularly sensitive to Fed interest rate policies, jumped nearly 20 basis points to close at 4.941%, reflecting market volatility and shifting trader sentiment.

In terms of broader economic indicators, the CPI for March reported a year-over-year increase of 3.5%, outpacing market expectations set at 3.4%. The month-over-month change registered at 0.4%, also exceeding expectations of 0.3%. Additionally, the core CPI, excluding food and energy, showed a similar upward trajectory.

This comprehensive CPI report served as a significant blow to market confidence

Following its release, the probability of a Fed rate cut in the first half of the year diminished sharplyAccording to the CME “FedWatch” tool, the likelihood of the Fed maintaining its current rate through June rose to 76.8%. Meanwhile, the odds of a 25-basis-point cut dropped to 22.9%, and the chance of a 50-basis-point cut dwindled to 0.3%.

Analysts interpret the accelerated growth in CPI as further evidence that inflationary pressures may not be easing as temporarily hopedExperts suggest that the Fed's progress in controlling inflation may be stagnating, potentially leading to a prolonged period of elevated interest rates and postponed rate cuts.

Outside of stock market turmoil, key global commodities also responded to these developments