Federal Reserve Governor Lael Brainard pulled the rug out from under the markets on Tuesday when she said, “Inflation is much too high and subject to upside risks and The Fed is prepared to take stronger action if inflation and inflation expectations suggest the need.” Nothing new but remember algorithms have no FOMO emotion while the bond market had a mini taper tantrum.
Highlights from Brainard Speech
- Combined impact of rate hikes and balance sheet reduction will bring policy to a more-neutral position later this year
- After policy is more neutral, extent of additional tightening depends on the evolving outlook
- Fed will tighten ‘methodically’ through a series of rate hikes
- War and covid lockdowns in China likely to extend supply chain bottlenecks and hurt growth
- I am watching yield curve and other data for suggests of increased downside risks to economy
- I am carefully monitoring rotation from demand for goods back to services and whether that occurs without sparking inflation
- Expects balance sheet to shrink significantly faster than the last cycle
Fed Governor Brainard saying a more rapid pace of balance sheet reduction got the taper tantrum in play and the U.S. Dollar higher. The USD Index rose 0.4% to 99.39 with the interest rate differentials factoring into the forward margins and therefore the dollar’s strength.
Yields across the curve went to highs for the day and sitting at multi-year highs.
- 2-yr: +10 bps to 2.52%
- 3-yr: +13 bps to 2.74%
- 5-yr: +16 bps to 2.71%
- 10-yr: +14 bps to 2.55%
- 30-yr: +11 bps to 2.59%
THE S&P500 sold off from over 4590 to 4544 with the Small Cap Russel selling off from 2110 to 2057
From The TradersCommunity News Desk