Please confirm your role to access this content.The content you are trying to access is restricted and intended for Financial Advisors only. The information provided on this Site is only for such persons. To continue, please affirm the below.
Inflation has remained stubbornly high all year, driven by consistent increases in the costs of shelter, food, and medical care. As for this week’s inflation reading, consensus among economists is calling for the headline Consumer Price Index (CPI) to drop to +8.8%, from last month’s +9.1%. After the July Federal Open Market Committee (FOMC) meeting, the market is surprisingly optimistic that the Fed will begin to slow the pace and severity of rate hikes going forwardLooking at the Implied Federal Funds Rate, the current expectation is for additional hikes through the remainder of 2022, with a potential transition to rate cuts in 2023.
Source Bloomberg LP as of 8/3/2022.
Source: Bloomberg LP as of 8/3/2022
The expectation for rate cuts is an aggressive stance that has made both the bond market and the equity market vulnerable to a hawkish surprise. Until prices start coming down meaningfully, the Fed will continue to prioritize price stability over growth. As Chair Powell stated, “There isn’t an option to fail”Several other Fed members have been vocal about current market expectations. Minneapolis Fed President Neel Kashkari made several comments indicating he was surprised by the market’s interpretation, stating the committee was a long way off from the 2% inflation target. Looking at the Fed Dot Plot below, -the chart highlighting each Fed official’s projection of the policy rate, we also see a very different narrative for next year.
Source Bloomberg LP as of 8/4/2022.
Inflation must fall quickly to justify the market’s stance. Any upside surprise to this week’s release could trigger a repricing of both interest rates and equity prices