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Bullard In A China Shop, Fed Calls Valentines Day Meeting, Stress Test Scenarios Released
The much anticipated CPI reading on Thursday brought concerns about inflation to a fever-pitch. Commentators seem very comfortable saying they feel the Fed is behind the curve on inflation and a Fed President came out shortly after the reading and seemed to confirm their prognoses. The yield curve has flattened substantially and the 2-yr is now around levels where the 10-yr started 2022. This is an extraordinary pace.
St. Louis Federal Reserve President Jeremy Bullard made splashes in markets this week when he turned up the hawkishness in an interview with Bloomberg. He said he hoped the Federal Funds rate would be at 1.00% by July, a level which would require more aggressive action than the market was pricing in at the time of the interview. On Friday, other Fed officials began pushing back on Bullard’s comments. However, speculation was afoot when an unscheduled Fed meeting was announced for Monday, February 14th. Even some of the most hawkish Fed commentators view a hike between meetings as unlikely, but markets are pricing in a greater possibility of a 50 bps hike in March.
Goldman Sachs now forecasts 7 rate hikes, or one at every scheduled meeting in 2022. Citi, who had previously been pricing the same now has a 50 bps March hike as their base case. Some now even think a 75 bps hike in March is possible. Some Fed watchers believed the increasing ferocity of upward projections for rate hikes is a sign that the world’s most powerful central bank has lost control of the policy narrative at a particularly precarious time. The potential of a successful soft landing seems more and more doubted by the chorus of Fed watchers and commentators.
It should be noted that three Fed Presidents have stuck to the 25 bps narrative. Also, it is unclear how the precarious geopolitical situation will affect the Fed’s calculus, if at all. We will be continuing to monitor progress on issues affecting the Fed with a microscope. If there are any significant developments, we may choose to provide an intra-day update deviating from the normal schedule of this note.
On February 10, the Federal Reserve released their 2022 Dodd-Frank Act Stress Test scenarios. These scenarios provide a good window into thinking of Federal Reserve members. The tests have also come under a microscope lately as the GOP has suggested Biden’s nominees to the FOMC may use this supervisory tool to starve the Energy industry of capital. The stress test scenarios are available here.
The upcoming votes on Federal Reserve nominees, including Powell himself should be able to go through. However, they could be affected by the health-related absence of Senator Lujan. The Republicans currently have 50 Senators compared to the Democrats 49 because of the absence. The tapering of monthly purchases of $80 bn of Treasuries and $40 bn of MBS began in November and was accelerated in December. The Fed is on track to taper down to no more asset purchases by its March meeting, but still has around $30 bn in securities to purchase. The Fed will be done with asset purchases in mid-March 2022 at this pace. The benchmark yield on the 10-Year Yield was 1.93%
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