As widely expected, the Federal Reserve raised interest rates by the steepest increment since 2000 and decided to start shrinking its massive balance sheet, deploying the most aggressive tightening of monetary policy in decades to control soaring inflation.

The Fed will begin allowing its holdings of Treasuries and mortgage-backed securities to roll off in June at initial combined monthly pace of $47.5 billion, stepping up over $95 billion in three months.

“The Committee is highly attentive to inflation risks,” the Fed said adding a reference to COVID related lockdowns in China that “are likely to exacerbate supply chain disruptions.”  That comes on top of Russia’s invasion of Ukraine and related events, which are “creating additional upward pressure on inflation and are likely to weigh on economic activity.”

Generally speaking, the outcome was largely as anticipated.  The runoff of its balance sheet is largely in line with previous statements however it is now quantified in regard to the start date and the amount increasing over time.

Markets were relatively unchanged following the statement however perceptions changed dramatically during the press conference when the Fed chief stated hikes of 75 bps “are not something the Committee is actively considering” easing fears the Central Bank will embark upon even a more aggressive tightening campaign.

Equities led by energy, technology and the and financials rallied considerably, the two-year dropped in yield by over 20 basis points. The S & P 500 posted its best day since May 2020.

Tomorrow is the release of the all-inclusive BLS Employment report.  How will it be interpreted?

Last night the foreign markets were mixed.  London was up 1.20%, Paris up 1.83% and Frankfurt up1.51%.  China was up 0.68%, Japan down 0.11% and Hang Seng down 0.36%.

Dow and NASDAQ futures are down 0.4% and 0.8%, respectively on  monetary policy and inflation fears.  Oil is unchanged.  The 10-year is off 1/32 to yield 2.95%.


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