Fed Policy Does Not Add Up – August 29, 2022

A just-published report updated our outlook for the U.S. economy, and reiterated that underlying conditions remain resilient. Consequently, we do not agree with the forward market’s expectations of policy rate cuts next year.

We remain cyclically bearish towards bonds because the Fed’s (and the Treasury market’s) expectations do not add up, i.e. are not consistent:

  • The fed funds rate is expected to peak around 3.75% in the first half of 2023 (with some easing discounted thereafter in the forward markets).
  • No recession is anticipated by the Fed.
  • Inflation is seen as steadily receding to the 2% area in 2023-2024.


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