In a just-published report, we updated our outlook for Fed policy in view of last week’s FOMC meeting. The two main changes at the FOMC were that participants pulled forward the expected liftoff in policy rates, from 2024 to two hikes now being anticipated in 2023, and secondly an acknowledgement that it is now more uncertain about the inflation outlook. Having been adamant that the current bout of higher inflation was completely transitory, it now thinks that the rise is “largely” transitory. This represented only a small move by the Fed, and we expect a series of small steps over the next 6 to 12 months, as inflation proves more durable than the hyper-dovish Fed currently expects.
The need for emergency monetary policy has ended, with the economy booming and high odds that strong growth will persist for long enough to absorb any lingering economic slack. In our opinion, the risks are tilted toward an earlier, rather than a later, rate hike. Meanwhile, we expect that the Fed will announce no later than December, that QE will be tapered beginning next January.
In sum, we remain bearish on bonds, and expect Treasury yields to undergo another upleg once the current pause phase runs its course, most likely later this year when core inflation proves stickier than the Fed anticipates and the economy demonstrates ongoing strength.