Courtesy of ZeroHedge View original post here.
One day after markets freaked out that the Fed's tightening plans had suffered irreparable damage at the hands of Vladimir Putin, whose incursion into Ukraine would mean not only sharply higher inflation but a much greater global slowdown than many had feared, prompting several ECB talking heads to hint at a pause in normalization, moments ago one of the Fed's most notable hawks, St Louis Fed president Jim Bulllard, tried to ease market fears by calling for a “rapid withdrawal of policy accommodation” and emphasized policy makers must follow through with rate hikes and balance sheet runoff or risk damaging the central bank’s credibility.
Speaking at a a meeting of Greater St. Louis, Bullard said that while inflation “has surprised substantially to the upside", the current situation "calls for rapid withdrawal of policy accommodation in order to preserve the best chance for a long and durable expansion”, even though the best chance for preserving the expansion would have been a rate hike some time in late 2020 early 2021 and now many wonder if it's not already too late.
Repeating a familiar mantra which may have been accurate last quarter but is now woefully out of date, especially after the Atlanta Fed's GDP Nowcast showed that Q1 GDP is trending at 0.0%, Bullard said that the U.S. economy is "doing better in terms of inflation-adjusted consumption than it would have been without the pandemic", pointing to the trend line drawn from 2011, adding that the real economy has more than fully recovered from the pandemic recession.
Bullard then said something that is somewhat accurate, namely that "the FOMC must now follow through with policy rate increases and balance sheet runoff or risk squandering policy credibility", although it still remains unclear just how the Fed will alleviate supply-driven inflation which is where the bulk of the commodity price bottleneck is right now. To be sure, oil isn't trading at $111 because of demand considerations.
Bullard also said that “the FOMC may have to move more aggressively going forward if inflation increases or does not moderate as much as expected”, although how more "aggressive" tightening will not send the broader US economy into a recession is unclear.
The regional Fed president also said Fed policy settings are “putting upward pressure on inflation, exacerbating the inflation problem.”
Addressing the Russia-Ukraine war, Bullard said it will have to be monitored closely but will likely impact Europe more directly than the US, even though as we explained previously, the US will certainly be adversely impacted as well. Bullard also said that global energy markets will be impacted over the short-to-medium term, which may lead to increased U.S. production of oil and natural gas.
Following the publication of Powell's prepared remarks earlier, and Bullard's hawkish commentary, Eurodollars have whipsawed again, sliding to session lows of 98.335, and translating into a fully priced in 25bps rate hike in March and 8% odds of a 50bps rate hike, while for the full year 2022 the market is now again pricing in more than 5 rate hikes, or 5.275 to be precise.
