- Stocks in the United States fell and Treasury yields rose after the highest inflation reading in four decades prompted a Federal Reserve official to call for faster rate hikes.
- After data showed that consumer prices rose by more than 7% last month, the two-year bond rate jumped as much as 26 basis points in one of the fastest moves in a decade. James Bullard, chairman of the Federal Reserve Bank of St. Louis, stated that the central bank should raise interest rates by 100 basis points over the next three meetings. Risk assets fell as a result, with the S&P 500 falling 1.8% and the tech-heavy Nasdaq 100 falling 2.3%.
- Bullard's strategy calls for spreading the increases over three meetings, shrinking the Fed's balance sheet beginning in the second quarter, and deciding on the path of rates in the second half based on updated data. He stated that he was undecided whether the March meeting should begin with 50 basis points and raised the possibility of the Fed considering a move between scheduled meetings at some point.
- Overnight index swaps are pricing about 80% odds of a 50 basis point rise in March, with an additional 25 basis points priced for May and June. The December Fed meeting was priced with just under six-and-a-half quarter-point moves.
- The Fed cut the upper band of its target funds rate to 0.25% at the start of the pandemic in 2020, matching the lowest level on record, and has kept it there ever since to promote economic recovery. The flood of liquidity boosted stocks, propelling the S&P 500 to new highs through 2021 and into the first days of January. However, fears of monetary tightening have sent stocks lower this year, with the S&P 500 down about 5% year to date.
