In remarks prepared for a Tuesday speech to the Minneapolis Federal Reserve Bank Federal Reserve Governor Lael Brainard said “Currently, inflation is much too high and is subject to upside risks. The committee is prepared to take stronger action if indicators of inflation and inflation expectations indicate that such action is warranted.” And she called for reducing the Fed’s balance sheet as early as next month.
“Given that the recovery has been considerably stronger and faster than in the previous cycle, I expect the balance sheet to shrink considerably more rapidly than in the previous recovery, with significantly larger caps and a much shorter period to phase in the maximum caps compared with 2017–19,” she added. The Fed’s Open Market Committee, its interest rate setting body, next meets on May 4.
In its last Dot-Plot projections released at the Fed’s March meeting the central bank pointed to at least six more interest rate increases for the rest of this year. The financial market consensus is that at least the next two increases to benchmark rates will be 50 basis points each rather than a business-as-usual 25 basis-point move.
The bond market certainly heard Brainard’s remarks as a promise of more action faster. The yield on the 10-year Treasury rose to 2.55% (as of noon New York time) as bond prices fell. That was a huge jump, for the Treasury market, of 16 basis points on the day. The yield on the 30-year Treasury rose to 2.59% from 2.46% yesterday.
The 5-year yield jumped to 2.70% from 2.55% yesterday to keep the yield curve in inversion at the 5-year marker.
The yield on the 2-year Treasury rose to 2.52% today from 2.42% yesterday.
Stocks reacted with a mild drop to begin the day–suggesting that Brainard’s comments weren’t news to stock investors–and then bigger selling by the close. The Standard & Poor’s 500 lost 0.60% today as of noon in New York after gaining 0.81% yesterday, but thenclosed down 1.26% on the day. The Dow Jones Industrial Average was off 0.14% in the morning but ended down 0.37%. The biggest damage came in technology stocks after yesterday’s rally in the sector. The NASDAQ Composite was down 1.70% at noon and the NASDAQ 100 was lower by 1.66%. By the clos the NASDAQ Composite had lost 2.26% and the NASDAQ 100 was lower by 2.24%.
Some of yesterday’s big winners are down heavily today. SentinelOne (S), for example, was down 7.99% after gasining 6.84% yesterday. Marvell Technology (MRVL) was down 6.37% today after gaining 2.66% yesterday.
Utility and drug stocks, two safe-haven favorites recently, were up. The Utility Select Sector SPDR ETF (XLU) was up 1.33% as of noon in New York today and ended the day ahead 0.63%. Bristol Myers Squibb (BMY) had gained 1.42% by the close.
