Financial markets rebounded strongly last week after recent communication from Federal Reserve (Fed) officials indicated that larger rate hikes this summer could provide the Fed with more flexibility to pause its tightening this fall. Release of the Fed meeting minutes for May also signaled a less “hawkish” stance than investors feared. The Fed minutes suggested that with survey-based measures projecting a “significant deceleration in inflation in the coming years,” the Fed would have the ability to reassess the effects of policy firming later this year.
This week, Friday’s employment report takes center stage among economic releases. Fed officials will be looking for some signs of cooling in the labor markets as an indication that rate hikes are beginning to impact what Chair Jerome Powell has labeled an “overheated” job market. Another notable event starting this week is the runoff of the Fed’s $9 trillion bond portfolio. The Fed will be watching closely for any signs of vulnerability in the liquidity of markets for Treasury securities and its impact on financial stability as quantitative tightening begins.
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