Yield Curve Inverts, Prices In Multiple Rate-Cuts After Fed’s Waller Goes Full Hawktard

Fed Governor Christopher Waller said he decided to support a quarter-point hike because geopolitical events called for caution, even though the data were “screaming” for a half-point rise. However, Waller, speaking Friday in an interview on CNBC, said he would like to “front-load” interest-rate hikes:

“I really favor front-loading our rate hikes, that we need to do more withdrawal of accommodation now if we want to have an impact on inflation later this year and next year,” he told CNBC’s Steve Liesman during a live “Squawk Box” interview.

“So in that sense, the way to front-load it is to pull some rate hikes forward, which would imply 50 basis points at one or multiple meetings in the near future.”

In addition to the rate hikes, Waller said he thinks the Fed needs to start reducing its bond holdings soon.

“We’re in a different place than we were before,” he said.

“We have a much bigger balance sheet, the economy’s in a much different position. Inflation is raging. So, we’re in a position where we could actually draw down a large amount of liquidity out of the system without really doing much damage.”

The reaction to Waller’s hawkish comments was swift with the market pricing in a Fed rate above 2.00% by year-end 2022, but as the chart below shows, that surge in rates is correspondingly being met by a market now expecting a recession and pricing in more than 2 rate-cuts in 2023/24…

Source: Bloomberg

As the chart above shows, rate-cuts did not start to get priced in until Fed rate-hike expectations topped 1.50% (which in and of itself is quite pathetic), but if The Fed expects to fight double-digit inflation with a Fed rate of 2.00% and no QT, then we have a bridge they might be interested in.

The rest of the yield curve is “screaming” (to borrow from Waller’s parlance) that The Fed is about to commit a major policy error as 3/5s, 3s10s, 5s10s, 7s10s, and 20s30s are all now inverted…

Recession much?

This will not end well…