The reverberations from Fed-speak yesterday — especially from Fed Governor Lael Brainard, long understood to be among the most dovish participants of the Federal Open Market Committee (FOMC) — continue to work negative sentiment into pre-market futures this morning. Brainard is among the latest Fed participants to call for a 50 basis-point interest rate hike at its next meeting four weeks from now, as well as an aggressive ratcheting down of the Fed’s $9 trillion balance sheet.
Brainard’s comments follow similar — and similarly direct — comments from Fed Chair Jay Powell a couple weeks back. Also, yesterday we heard from San Francisco Fed President Mary Daly, who suggested that “inflation at 40-year highs are as harmful as not having a job.” Meaning she is on board with working to aggressively bring down inflation via Fed policy. So markets are now pricing in harsher Fed policy at its May 3-4 meeting, and it’s pulling indexes further into the red.
The Dow has shucked -200 points thus far in today’s pre-market, while the S&P 500 is down -37 points. The Nasdaq, after having outperformed the other indexes during the nice rally we saw through the second half of March — right around the time of the last Fed meeting — is now hitting the skids a bit harder than the others, -218 points at this hour.
Speaking of that March meeting, the minutes from it will be released later today. These minutes allow for a more granular look at the Fed’s decision-making process. Back when the minutes from the January FOMC meeting were released, even though the U.S. monetary policy body decided not to raise interest rates at that time, there were loud concerns about trimming the balance sheet, and even some of the more hawkish Fed presidents — such at St. Louis’ James Bullard — that 50 basis points was called for.
Now that interest rate hikes are here, we’ll be able to see how many voting members wanted to see a half-point raise, and how many wanted to commence drawing down those $9 trillion in Treasury and mortgage-based assets at the meeting March 15-16. If past is prologue, these more hawkish viewpoints may be those adopted by the more dovish voting members in the months to come.
Inflation, especially in Construction, Energy and Housing, are where the economy is carrying most of its baggage at the moment. We still see supply-chain issues on the global markets, aggravated by the Russian invasion of Ukraine, while we also see mortgage rates moving higher based on that mere 25 basis-point raise. The Housing market in particular had been running very hot ahead of the March Fed meeting; could it be because prospective home-buyers knew higher rates — thus higher mortgage rates — were coming?