Stocks & Bonds Tumble After Bullard Signals More Hawkish Fed Possible
Is ‘good’ news, bad news again?
This morning’s better-than-expected retail sales data prompted a positive buying wave in futures but St.Louis Fed President Jim Bullard cast his hawkish net and sent stocks back into the red…
While we are all used to Bullard’s hawkishness, he turned up the dial to ’11’ this morning, warning that current Fed policy is putting upward pressure on inflation, and suggesting that if the Fed was to move more hawkishly sooner it would allow them to go more shallow later.
“I think it behooves the committee to go in a more hawkish direction in the next couple of meetings, so we are managing the risk of inflation appropriately,”
Bullard added that even if inflation comes back down lower, the Fed is still in a good place for next year and can keep policy rates lower.
“I think we’ve gotten past the taper-tantrum issue because we went ahead with the taper. We could move faster — we kept optionality on this that we could speed up the taper if it is appropriate,”
The Fed’s new ‘bad cop’ also sent bond yields higher…
The St.Louis president also warned that there are other ways the Fed could act hawkishly, including signalling they could hike before taper concludes (or to allow the balance sheet to run off after tapering).
“Another consideration I would put on the table, and have put on the table, is we can allow runoff of the balance sheet at the end of the taper instead of waiting on that decision for a while. I think that would be a way to have a somewhat more hawkish policy than otherwise”
Finally, confirming the market’s expectation – but not Fed consensus – Bullard reiterated that he sees two hikes next year.
STIRs shifted modestly hawkishly on the headlines also.
Tue, 11/16/2021 – 09:30