Fed losing patience with inflation progress, near peak "hawkish" vs futures. Retail looks to be near capitulation

Investors appear to have given up all hope for any soft landing post the Sept FOMC (9/21). Looking at market reactions, post-FOMC:

  • Fed Funds futures now pricing 4.75% Fed Funds rate by June 2023
  • Inflation breakevens 1-year forward have dropped to 1.97%
  • Fed Funds implied June 2023 +38bp
  • Inflation 12M forward dropped -32bp
  • Implied Fed funds above the Fed's projection of 4.6% by YE 2023

In other words, one possible way to explain this divergence of the Fed Funds terminal rate up sharply BUT inflation expectations falling is:

  • the Fed has lost patience with waiting for inflation to improve
  • thus, wants to raise the real cost of money to accelerate the decline in inflation
The video in this report is only accessible to members

While the movements in rates raised concerns that a recession is inevitable, this is not necessarily the case. After all, there are a few considerations:

  • inflation is set to ease and if labor markets cool, this puts the Fed in a position to pause
  • JPMorgan Economists reiterate this, noting a soft landing remains the base case
  • this step up in Fed rhetoric can arguably be viewed as "peak Fed hawkishness"
  • as long as inflation begins to decline at a faster pace
The video in this report is only accessible to members

INFLATION DEATH CROSS: Sticky Core CPI (ex-shelter) is actually cooling to 5.2% annualized from 7.8% in M...

Unlock this article with a FREE 30-Day Trial!

An FSI Pro, or FSI Macro subscription is required in order to access this content.

*Free trial available only on a monthly plan

More from the author

Disclosures (show)

Get invaluable analysis of the market and stocks. Cancel at any time. Start Free Trial

Articles Read 2/2

🎁 Unlock 1 extra article by joining our Community!

You’ve reached your limit of 2 free monthly articles. Please enter your email to unlock 1 more articles.

Already have an account? Sign In

Don't Miss Out
First Month Free