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Recessions occur because the Fed's short-term interest rates determine the level of all rates in the economy: the Fed's rate hike implies higher rates for credit to companies, for mortgage loans and for consumer loans, etc.
They will peak once the Fed is done tightening. Slowing demand to bring down inflation without significant pain is “not getting any easier”, but markets (still?) price in a soft landing.
The main goal is to avoid long-run inflation expectations de-anchoring; rates will be at a “modestly restrictive level” by year-end.
We now expect more rate hike front-loading as the FOMC turns more hawkish following persistently high inflation readings from last week.
May 16, 2022
US | Treasury yields and interest rates will likely peak once the Fed is done tightening
Bringing inflation back down to target will likely cause “some pain”; yet, markets are (still) pricing in a soft landing. With the Fed set to hike rates by 50 bps in June and July, the tightening pace is set to be the fastest since the 1994-1995 hiking cycle.
In the United States, after more than a decade in which inflation was consistently below the Federal Reserve's (FED) target, it has risen to levels not seen in 40 years.
We expect the Fed to hike the fed funds rate by 50bps and launch QT amid “much too high” inflation. The aim will be to bring inflation down while achieving a soft-landing of the economy.
The COVID pandemic resulted in an unprecedented collapse in both aggregate supply and demand for most of the world's economies.