Financial markets are experiencing heightened volatility and tighter conditions as central banks employ more restrictive monetary policies to combat persistent inflation. Risk assets have sold off and bond returns have been negatively impacted by the dramatic rise in rates.
Market volatility continued this week as investors absorbed new inflation data and the prospect of further rate hikes by the Federal Reserve in response. U.S. consumer price increases exceeded consensus forecasts in April, while moderating slightly from March. The Consumer Price Index (CPI) was up 8.3% year-over-year in April, higher than the 8.1% consensus estimate but down from 8.5% year-over-year in March.
Financial markets remained volatile this week after digesting the actions of the Federal Open Market Committee (FOMC). The FOMC announced it would raise the federal funds rate by 0.50% to a range of 0.75%- 1.00% and begin shrinking its $9 trillion balance sheet starting June 1st. The FOMC will initially reduce its balance sheet by $47.5 billion, increasing to $95 billion per month after three months with a combination of US Treasury, agency debt, and agency mortgage-backed securities. Federal Reserve Chair Powell took steam out of market speculation that the Fed would further ratchet up its pace of tightening by saying “a 75 basis point increase is not something the committee is actively considering,” which provided a catalyst for lower short term rates in the near term.
