![]() Market rates have dropped like a stone – time for the Fed to sell bonds? Certainly, the consumer sector has been holding up better than many – including ourselves – expected, with strong jobs and income gains supporting spending. ![]() With that in mind, we think the Fed is not finished with its rate hikes and its new forecasts will indeed indicate a higher path for the Fed funds rate to 5% with potential slight upward revisions to near-term GDP, and persistently high inflation forecasts used to justify this. The Federal Reserve will need to see several months of core inflation readings of 0.1% or 0.2% to be confident that inflation is on its way back to target and this is likely to be a key plank of its messaging. The market reaction seems excessive to us given this is just one month of data, annual core inflation is still running at triple the target, and to hit 2% year-on-year the month-on-month readings need to average 0.17% over time – and we aren’t there yet. ![]() These moves were themselves triggered by a weak core CPI print for October that came in at 0.3% month-on-month versus a 0.5% consensus expectation, while the Fed’s favoured measure of inflation – the core personal consumer expenditure deflator – was even softer, rising just 0.2%. In this regard, the Fed will be concerned by the recent steep falls in Treasury yields and the dollar, coupled with a narrowing of credit spreads, which are loosening financial conditions – the exact opposite of what the Fed wants to see as it battles to get inflation lower. ![]()
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