“Getting inflation down is of paramount importance,” she said to get markets ready for what’s to come. And they are getting ready.
By Wolf Richter for WOLF STREET.
Fed Governor Lael Brainard, one of the biggest doves on the Fed’s monetary policy committee, explained in detail this morning that inflation is hitting low-income households much harder than high-income ones, and that it hits disadvantaged households, such as those with limited access to online shopping, even harder, and their inflation rates are much higher than national average inflation rates because the basket of goods that they buy is consistently different, and that they spend almost all of their money on basic necessities, and that they often cannot replace items that have jumped in price with cheaper items, because they are already buying the least expensive items expensive to begin with, and there’s no way to go any lower on the scale. They can only buy less, like buying less of the cheapest house brand cereal, which is the example she used.
It was an indictment of consumer price inflation, portraying it as the scourge it poses to people in the lower half of the income scale. And then she said the Fed should, and will, clamp down on inflation to get this under control.
During the speech, the text of which was published in advance earlier this morning, the average 30-year fixed mortgage rate jumped 18 basis points to 5.02% today, the highest since November 2018 .
But in November 2018, this measure of mortgage rates by Mortgage News Daily had briefly peaked at 5.05%, before the Fed caved under deadly attacks from Trump. But then inflation was below the Fed’s target, and now inflation is skyrocketing and out of control, and now it’s the White House that’s under fire from voters over of soaring consumer prices. There’s nothing in recent years that compares to this. The comparison must be made with the 1970s.
And instead of worrying about soaring mortgage rates, Brainard agreed that the market is starting to price in the “rapid increase in the key rate” and “faster balance sheet reduction” ahead compared to last time:
“In line with these expectations, we have already seen a significant tightening of market funding conditions at longer maturities, which tend to be most relevant to household and business decision-making. For example, mortgage rates over 30 years have risen more than 100 basis points in just a few months and are now at levels last seen in late 2018,” she said.
Brainard’s comments today added a new political reality to Fed policies: Inflation is a horror show at the lower end of the income spectrum, with inflation rates much higher among these households. than national average inflation rates which are more reflective of inflation rates recorded by higher income groups.
The two-year Treasury yield rose 9 basis points to 2.53% midday, the highest since March 2019, after exploding in six months from 0.2% last October, which is a huge move. Another 30 basis points will take the two-year yield to 2.83%, which would be the highest since 2007. And the Fed hasn’t even seriously started raising rates. He is simply telling the markets to prepare for it:
The 10-year Treasury yield jumped 16 basis points to 2.56% by midday, the highest since April 2019:
The yield curve again not inverted between the two-year yield (2.53%) and the 10-year yield (2.56%), after the 10-year yield exceeded the two-year yield.
But the yield curve retains its kangaroo shape: very steep from the one-month rate (0.17%) to the three-year rate (2.73%) then essentially flat, with a slight dip in the 10-year rate, a rise at the 20-year rate, and a reduction at the 20-year rate:
Longer maturities – from the five-year yield to the 30-year yield – will feel the quantitative tightening as the Fed shrinks its balance sheet by trillions of dollars. And it will levitate the yield curve at that end, even as short-term yields arrive with Fed rate hikes. The green line is the yield curve at its all-time lows in August 2020:
Here is what the market reacted to:
“It’s critically important to bring inflation down,” Brainard said in his speech today.
“Currently, inflation is far too high and subject to upside risks. The Committee stands ready to take stronger action if inflation indicators and inflation expectations indicate that such action is warranted,” she said.
“We are committed to bringing inflation back to its 2% target, recognizing that stable and low inflation is essential to maintaining a strong economy and a job market that works for everyone,” she said. .
The FOMC “would continue to tighten monetary policy methodically through a series of interest rate hikes and beginning to shrink the balance sheet at a rapid pace beginning at our May meeting,” she said.
“I expect the balance sheet to contract considerably faster than in the previous recovery, with significantly larger caps and a much shorter period to phase in the maximum caps compared to 2017-2019,” a- she declared.
As a reminder: last time, caps after the slow introduction were set at $50 billion per month in balance sheet reduction. This time, the caps would be “significantly higher” than $50 billion a month.
“I expect the combined effect of rate hikes and balance sheet shrinking to shift the policy stance back to a more neutral stance later this year, with the extent of further tightening over time depending on changes in the outlook for inflation and employment,” she said. noted.
And so far, the Fed’s “outlook” has changed significantly, to now see much higher inflation for much longer than a year ago.
For the consequences of Fed policies, read: My “wealth disparity monitor” from the era of the Fed’s money printer: Holy Moly. April update of the biggest economic injustice in recent history
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