This snippet from Deutsche Bank is some solid work indeed. Its in reference to the market response to the cooler CPI report last Thursday and push-back since then from Fed officials:
- Fed
Governor Waller gave some very hawkish remarks …. Waller said that markets got “way out in front”, that the CPI
“was just one data print”, and even pointed out that models such as the
Taylor Rule suggested that policy rates should be around 6-7% right now,
rather than just beneath 4% at present. - Another
issue is that every time the market starts to price a Fed pivot, that
itself eases market conditions, as seen with the decline in real yields.
But, easing financial conditions makes the Fed’s job of bringing down
inflation harder, which in turn actually makes a pivot less rather than
more likely. So, the opposite of a self-fulfilling prophecy. - That
said, our colleagues in rates research have suggested that US rates may
be near a turning point as risks become more balanced.
On that “price a Fed pivot, that itself eases market conditions”, yes. Goldman Sachs made the point last week also:
Then again, it ain’t our job to help the Fed out! 😉
