More from Harker: Would not take 50BP hikes off the table but not committed either

• Fed collectively underestimated impact fiscal spending would have on inflation
• Definitely correlation between yield curve and recession
• Still need to look at a host of market signals, including inflation expectations and market sentiment
• Would not take a 50 BP move off the table for next meeting but not committing either.
• Developments in China another wrench in supply chain, could make 50 bps hike more likely appropriate
• Balance sheet reduction could add equivalent of two quarter point rate increases to fed tightening
• On average consumers are strong, but lower income families getting crushed by inflation
• Fed can move methodically to neutral rate of 2.5%. Then the Fed can assess what to do next
• Wants to start balance sheet reductions sooner than later with reduction schedule on Autopilot.
• FOMC has not decided on reduction amounts yet
• Active debate still over passive runoff of balance sheet verses asset sales.
• Broad consensus on move out of MBS holding , but pace of exit still being debated, as is the proper composition of treasury holdings.
• Very uncertain how high the Fed funds rate needs to go to bring inflation down
• Demographic trends in the US may mean continue tight labor markets

On the yield curve the 2-10 year spread has moved down to a new low of 5.5 basis points. That is the lowest level since September 2019 and getting closer and closer to inverting. As Harker points out there is a correlation between inversion and recessions (see weekly chart of the spread below).