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10 Year at 2.38%, Yield Curve Flattening After Powell Goes “Full Hawk” in Remarks

Powell’s Monday remarks shook up markets as he continued to channel his “inner Volcker” (80’s reference). He referenced the Fed’s dual mandate as he remarked that inflation is “much too high” and the labor market is “strong.” Translation: It’s our mandate to raise rates aggressively. He followed that up by indicating that raising rates more than 25 basis points at a “meeting or meetings, we will do so” Market Assumption: Look for 50 basis point increases in May and June. A full 1% increase in a 2 month period hasn’t been seen in about 30 years. He admitted that the Fed “widely underestimated” upward price pressures (remember “we believe that base effects from the pandemic shutdown are distorting inflation statistics and it will smooth out within 6 months”?). It’s also noteworthy that he did not rule out raising rates above the so called “neutral rate” for a period in order to cool off inflation. The neutral rate is considered to be the rate that would be neither stimulative nor restrictive, is now about 2.5% (note that it was 4.2% in 2012). The Fed funds rate was 2.50% during much of 2019 before plummeting to 0% in March 2020. The yield curve is flattening as the 3, 5, 7, and 10 year treasuries are bunched within 4 bps of each other. This may be signaling a prediction of slowing growth as the “soft landing” unicorn may be elusive. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners