(2) Federal Reserve: hawkish tilt in 2022
It has arrived the time to care about comments that the Federal Reserve’s ultra-hawks are making.
This week, the president of the St. Louis Fed, James Bullard, urged for more hawkish policies to cool off inflationary pressures. He brought up interesting points, including that early hikes might allow the central bank to hike less, that it is still possible for the central bank to hike rates before tapering ends and that a balance sheet run-off might begin soon after the conclusion of tapering.
His comments didn't go unnoticed, and at the time of his speech, 5-year and 10-year yields rose approximately by 3bps. Yet soon after Bullard’s Bloomberg interview ended, yields dropped, signaling that the above hawkish comments do not make a difference after all.
However, they might soon have more weight as Bullard, and another five notable hawks will be voting members at the FOMC meetings next year. That’s a clear hawkish tilt from the dovish Fed we have witnessed to in 2021.
The implication of such a change is key for the bond market because while the Federal Reserve has been comfortably behind the curve in acknowledging inflation risk until now, next year, it might not.