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  • Christian Armbruester

After Pivot

The Fed did what they had to do. The market had other ideas, and the two-year yield on Treasuries is now fifty basis points lower than the one-year, but still some seventy basis points higher than the ten-year. You would have to go back decades in time to see anything quite like this, but the implications are quite extraordinary.

Clearly, the market has convinced itself that the fight against inflation is over. That’s probably a tad optimistic, given the tightness in the labour market and rising input prices in the service sector, but who are we to judge. For the moment, there is every reason to take the tough talking Jerome Powell at his word. The market is still expecting at least one more hike, if not two, and maybe more, which puts the terminal rate somewhere above 5%.

Why amputate, when you have just administered the medicine, and no self-respecting central banker would immediately cut rates having just raised them. There is also a long lag before policy action translates into the real world, and no one is expecting inflation to be at the stated target rate of 2% until after 2025. That means the only way for interest rates to go lower any time soon, is for the wheels to completely come off. Sound bullish?


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