Dear Investors,
The Fed wants to keep rates high; the market is increasingly convinced that is not going to be the case.
Expectations of rate cuts are forming, and asset prices are rallying accordingly.
The FOMC statement acknowledged the quickening pace of disinflation and the fact that substantial tightening has been implemented already.
It follows from this that the ceiling for the terminal rate is capped and might well be hit in the next FOMC meeting.
In his press conference, Chair Powell delivered a relatively balanced message, recognising that the cycle is not entirely over,
but that there are emerging risks to the central bank’s preferred softlanding scenario (housing market and bank lending weakening).
Bottomline, the Fed is ready to pivot late this year, subject to price and jobs developments.
Central banks are stumbling into a nuanced phase of policy tightening after major macro events last week.
Lower energy and goods prices are pulling down overall inflation.
Yet tight job markets should keep wage growth above levels needed for core inflation to fall to 2% targets, reflected in a 54-year low for unemployment in the U.S.
BlackRock sees central banks close to pausing hikes: Major economies will see mild recessions but lingering inflation.
We like short-term bonds and credit.
Fed gets what it wants
This would entail annual average inflation easing to below 3% this year, but Fed officials are not convinced that it comes down to 2%.
As real interest rates rise, the labour market would soften, but only modestly.
