Halyard’s Weekly Wrap – 02/18/22

The front end of the interest rate markets have priced in between 0.75% and 1.00% of tightening over the past several months.  The one year US Treasury Bill has risen to 1.0% from 20bps in early December.  The Two year US Treasury Note similarly has increased to 1.48% from around 50bps in December.  The Two year note briefly traded above 1.60% at the end of last week as St. Louis Fed President Bullard began pounding the table for more immediate policy changes than the market had been expecting based on Powell’s measured and deliberate pace.  Yields have fallen a touch since then – being walked lower by Ukraine – Russia geopolitical risks and the release of the FOMC January meeting’s minutes, which showed an inclination to move faster but no hint of an imminent 50 bps increase.

Fed President Bullard, fearing that the Fed is behind the curve and that inflation may not recede in the near term, repeated his remarks Thursday – calling for 100bps increase in Fed Funds by July 1^st.  There are three FOMC meetings between today and July 1^st.  This indicates that Bullard sees at least one 50bps move higher.  We wonder if Bullard is inviting himself into a woodshed meeting with Chair Powell or whether Chair Powell has released the St Louis Fed President to the press to prepare the markets for a 50bps increase.  We highly doubt this FOMC has the fortitude to raise 50bps but time will tell.  We also found it interesting that if President Bullard wanted to raise rates faster and curtail the quantitative easing sooner wouldn’t he have voted against the others at the January FOMC?  Bullard also said he thinks the overnight neutral rate of interest is near 2%.  If that is the case does it make sense that the 10 year US Treasury note also yields 2%?