Stocks & Bonds Dumped After Fed’s Brainard Hawkish Comments

In case anyone had doubts about The Fed’s Lael Brainard’s transformation from dove to hawk, she opened her speech today by citing both Paul Volcker and Arthur Burns…

Forty years ago, Paul Volcker noted that the dual mandate isn’t an either-or proposition and that runaway inflation “would be the greatest threat to the continuing growth of the economy… and ultimately, to employment.”

Arthur Burns noted in the late 1960s that “there can be little doubt that poor people…are the chief sufferers of inflation.”

Brainard then ripped off her historically dovish mask completely and unveiled the uber-hawk in a speech at a conference sponsored by the central bank’s regional bank in Minneapolis this morning:

“Currently, inflation is much too high and is subject to upside risks,” Brainard said, adding that “it is of paramount importance to get inflation down.”

Nothing really new there BUT, then Brainard dropped the following on the balance sheet:

To bring inflation down, the Fed will “continue tightening monetary policy methodically through a series of interest rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting,” Brainard said.

The Fed is “prepared to take stronger action if indicators of inflation and inflation expectations indicate that such action is warranted,” she said.

 She then went even further…

“Given that the recovery has been considerably stronger and faster than in the previous cycle, I expect the balance sheet to shrink considerably more rapidly than in the previous recovery, with significantly larger caps and a much shorter period to phase in the maximum caps compared with 2017–19.”

Concluding that:

“I expect the combined effect of rate increases and balance sheet reduction to bring the stance of policy to a more neutral position later this year with the full extent of additional tightening over time dependent on how the outlook for inflation and employment evolves.”

And that was enough to slam stocks lower…

Rapidly erasing yesterday’s exuberance…

Bond yields spiked further with 10Y hitting 2.50%…

It appears The Fed is preparing the stock market for pain ahead… will it get the message that bonds have been getting for weeks?