Week in Review: April 8, 2022

Markets ended the week lower as investors digested ongoing headlines out of Ukraine, the brief 2-10 yield curve inversion, the release of the Federal Reserve’s March meeting minutes, and comments from a bevy of Fed officials. Notable among the comments were those by Fed governor Lael Brainard. Often viewed as “dovish,” Brainard struck a more assertive tone saying that the Fed will begin to reduce its balance sheet at a “rapid pace,” starting as soon as May. That was corroborated by the Fed’s March meeting minutes which stated that officials reviewed multiple options for reducing the balance sheet, all of which “featured a more rapid pace of balance sheet runoff than in the 2017-19 episode.”

The minutes further stated that officials generally agreed that the Fed should aim to reduce its balance sheet holdings by $95B/month. The combination of Brainard’s comments and the minutes led to a sharp sell off in longer-dated Treasuries, increasing the 10-Year Treasury yield by 0.33% over the course of the week. That was enough to reverse the brief 2-10 inversion at the start of the week. As a yield curve inversion is generally viewed as a harbinger of recession, investors will now be left to debate whether the short-lived inversion was an anomaly, or whether it portends further economic slowing.

The minutes also confirmed that the Fed is strongly considering raising rates by 0.50% at upcoming meetings, something it hasn’t done since 2000. The minutes indicated that such a move might be necessary “if inflation pressures remained elevated or intensified.” Given the recent sharp rise in commodity prices following Russia’s invasion of Ukraine, a 0.50% increase at the Fed’s May meeting seems highly likely. The futures markets have priced this in, as expectations for such a move currently stand at 79%.