The Fed's semi-annual Financial Stability Report on Monday warned that liquidity conditions in major financial markets have deteriorated due to rising risks from the Russian-Ukrainian war, monetary tightening and high inflation. "According to some indicators, liquidity in the newly issued U.S. spot Treasury bond market and equity index futures market has declined since late 2021," the report said. “While the recent deterioration in liquidity has not been as extreme as in some past periods, the risk of a sudden sharp deterioration appears to be higher than normal,” the report said. “Furthermore, since Russia’s invasion of Ukraine, liquidity in oil futures markets has at times been somewhat strained, while markets in some of the other affected commodities have been markedly dysfunctional,” Fed Governor Brainard said in a press release accompanying the report. , the war "triggered price volatility and margin calls in commodity markets and highlighted a potential channel through which large financial institutions could be infected."

Despite all the reluctance, Wall Street will have to face a new reality in 2022: This is not a good year for the stock market. Last week, Credit Suisse downgraded its forecast for the S&P 500. Goldman Sachs, Bank of America and Morgan Stanley are now also predicting a difficult year for stocks. The Federal Reserve is in the midst of an aggressive rate hike cycle that is expected to weigh on U.S. corporate earnings and economic growth. That could dent a key support for equities -- after loose monetary policy helped the S&P 500 rise more than 100% from the outbreak of the virus in March 2020 to the end of last year. Even if the U.S. escapes a recession, stocks look risky, Goldman strategists said. "The best-case scenario for the economy -- and ultimately for stock prices -- could include a period of limited stock market returns," Goldman Sachs strategists led by David Kostin wrote in a note to clients. "Volatility will remain elevated until the inflation path is clear."

Atlanta Fed President Raphael Bostic said he supports policymakers continuing to raise rates at a 50-basis-point pace rather than larger ones. 50 basis points "is already quite aggressive action," Bostic said in an interview with Michael McKee on Bloomberg TV Monday. "I don't think we need to be more aggressive. I think we can keep that pace and rhythm and really see how the market goes. Development.” Fed officials last week raised rates by 50 basis points, and Chairman Jerome Powell signaled they would continue at that pace at their June and July meetings, downplaying the possibility of a 75 basis point hike. Atlanta Fed President Raphael Bostic said there was no need for the Fed to raise rates by 75 basis points at a time. Critics say the Fed has been too slow to tighten policy in the face of the hottest inflation in 40 years. St. Louis Fed President James Bullard said that while 75 basis points was not his forecast, the Fed could consider raising rates by so much if necessary and was successfully used by the Fed during the 1990s expansion.

After a weekend of debate, the European Union is expected to ease the strength of Russia's oil sanctions package, but still intends to maintain key provisions on shipping that would limit Russia's ability to export crude around the world. The EU will reject a plan to ban EU ships from carrying Russian crude to third countries, but still plans to ban insurance for it, according to documents seen by Bloomberg and people familiar with the matter. EU member states such as Greece, which own a sizable number of ships, believe that because there is no agreement among the G-7, they want the EU to remove the proposed rule in its sixth sanctions package against Russia. Banning EU ships from transporting Russian crude to any location would have further restricted Russia's exports, an important source of hard currency. EU countries are still debating a sixth package this week, with diplomats trying to change Hungary's opposition. The EU failed to reach a deal over the weekend.

Russia is facing its worst economic contraction in nearly three decades, and its gross domestic product could shrink by as much as 12 percent this year under pressure from the United States and its allies to impose sanctions over Russia's invasion of Ukraine, internal forecasts by the Russian Finance Ministry show. The Russian government has yet to issue a public economic outlook, with the economy ministry forecasting an 8 percent contraction, said people familiar with the matter who asked not to be named. The Treasury Department data means Russia will suffer similar economic pain to the early 1990s. At the time, Russia was moving from a Soviet-era economic model to capitalism, suffering its worst economic contraction since World War II.

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