Excessive tightening?
It should be noted that Powell’s comments and the hawkish pricing of interest rate hikes by the market did not stop inflation expectations from rising. The 10-year metric crossed 3% on its way to an all-time high.
“The Fed has lost control of inflation,” Varanello said. “Is it going to be too hawkish, or will inflation go down and help them?”
The lack of clarity in inflation, and the Federal Reserve’s response, have complicated efforts to forecast long-term prospects for the bond market.
Bond markets suffer record losses in light of monetary tightening
If the pace of price growth slows, the Fed may be able to pause its increases, leading to a relatively lower peak in the overnight lending rate, which the market sees as not far above the central bank’s current estimate of 2.8% by the end of next year. Prices are currently trading in the 0.25-0.50% range. But there is also the risk that inflation will persist, or that an interest rate hike by the Federal Reserve will push the economy into recession.
“Despite the jitters and volatility of recent months, the market is evaluating a rate tightening cycle similar to what we saw previously with peak implied target interest at 3.25%,” said Bob Miller, Head of Basic Fixed Income Americas at BlackRock. .
“The trajectory of inflation over the next six months is what will drive the Fed and the final pricing. That will largely determine whether the Fed’s target interest is going to be 2.5%, 3.5% or higher,” he added.