If markets remain optimistic, the central bank will just have to tighten more to achieve its inflation objective.
Despite the Fed’s clear warnings of more tightening to come, investors aren’t getting the message.
Futures markets still suggest a peak federal funds rate of less than 5%, about 20 basis points lower than the Fed’s projections, with rate cuts beginning next summer.
Perhaps markets doubt the Fed’s resolve, and expect it to capitulate as soon as the unemployment rate moves higher. If so, they’re wrong.
Household and business balance sheets are in very good shape, and there’s little risk of a financial cataclysm like what happened in 2008.
Bill Dudley Bloomberg 19 december 2022
That inflation having topped 8% will get back to 3% in barely 12 months looks far-fetched.
The monthly Bank of America Corp. Fund Manager Survey, running for more than two decades, found that investors were the most overweight in bonds compared to stocks since March 2009.
Bullishness about bonds, meanwhile, is rooted in bearishness about the economy, and by extension in a conviction that the central banks have this wrong and are tightening too much.
A growing majority of observers think inflation is at last at the point where it will come down without too much more help from monetary policy.
Once inflation exceeds 8.0%, there’s a wide range of experiences, but it’s reasonable to expect a decade to get back to 3.0%.
The economy is constantly changing, of course, but on the basis of post-1970 history, the notion that inflation having topped 8% will get back to 3% in barely 12 months looks far-fetched.
John Authers Bloomberg 19 december 2022
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