US Fed ready to take “stronger” actions to bring inflation down

The widely awaited intervention of Lael Brainard, member of the Fed’s Board of Governors, gave clear indications on the acceleration of the monetary tightening expected in the coming months to bring inflation down in the US (where it reached 7.9% yoy in Feb-22). A series of higher-than-expected interest rate hikes (up to 50 basis points) and a swift reduction of the Fed’s balance sheet as soon as May are on the table. 

The market impact was significant as the US 10-year treasury yield jumped above 2.55% and moved back above the 2-year treasury rate while the EURUSD rate dropped as low as 1.09 following Brainard’s intervention, which was its lowest level since March 14.

Finally, the release of services PMI confirmed yesterday the absence of impact of the war in Ukraine on services so far notably with 58 in March 2022 for the US and 55.6 for the Euro Zone as looser Covid-linked restrictions pushed activity higher. On the opposite, the Chinese Caixin Services PMI index fell in contraction zone to 42 in March, down from 52 in February due to a tightening of restrictive measures to fight against a resurgence of COVID cases.

On the agenda today, the release of the FOMC Meeting minutes will be closely watched as it should give more details on the upcoming reduction in the Fed’s balance sheet. Talks between EU ambassadors to agree on the new sanction package against Russia including a ban on coal imports will also be at the center of attention.