, Columnist
Markets Still Don’t Get How Far the Fed Might Go
U.S. debt burdens will be much less of a drag than investors appear to expect.
Prepare for liftoff.
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A strange disconnect has emerged in financial markets. Investors now expect the Federal Reserve to raise interest rates this year much more aggressively than previously thought, to combat persistent inflation. Yet their expectations for how high rates will go haven’t changed much, reaching around 2% in late 2023 — the lowest cycle peak since the mid-1950s. Beyond that, they actually foresee a decline, suggesting that a sharp economic slowdown will force the Fed to reverse course.
I think such forecasts are misguided, and stem from a misunderstanding about how the Fed’s monetary tightening will affect the U.S. economy.