January has been marked by a surge in market volatility, with financial assets repricing to reflect more aggressive monetary tightening on the horizon. The front end of the yield curve has taken the brunt of the damage, with 2-year Treasury rates increasing by nearly 50 basis points. The bond market is now pricing in five rate hikes this year and another three in 2023.
While the Federal Reserve (Fed) has shifted its focus to fighting inflation, the flattening of the yield curve suggests bond investors are just as concerned about slowing economic growth ahead and growing risk of a policy error by the Fed. The balancing act between growth and inflation for policymakers will be even more challenging if the U.S. economic recovery begins to lose steam.
This week’s economic calendar is highlighted by Friday’s employment release — another important data point as the Fed begins its path to normalize policy.
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