Fed’s Daly: Can start balance sheet reduction as early as May meeting

San Francisco Fed President Mary Daly explained that the labour market is extremely tight while the Fed is on a path to raising interest rates. She added inflation is as harmful as not having a job while many of the imbalances we see are covid-related.

Key Quotes:
”I don’t expect a big slowdown in the US economy due to high oil prices,” she said, adding that the Fed projections do not show a lot of ‘overshooting’ on rates”.

”We can start the balance sheet reduction as early as the May meeting.”

”The Fed will use balance sheet reductions in addition to rate hikes to reduce policy accommodation.”

Financial markets still digest the comments while US Treasury yields already rose to multi-year highs as comments from US Federal Reserve Governor Lael Brainard put investor focus on the possibility of aggressive monetary policy tightening.

Yields rallied after Brainard said she expects rapid fire style of reductions to the Fed’s balance sheet alongside methodical increases to the benchmark rate. The yield on 10-year Treasury notes (up 12.9 basis points to 2.541% while the 2-year note yield was up 9.2 basis points at 2.520%, leaving the 2-10 curve at 2 basis points after having been inverted for the most part since last week. Wednesday brings the release of minutes from the FOMC’s last policy meeting.