Mar 08, 2023
We cannot avoid writing about inflation again after the hawkish comments from the Fed Chair yesterday before Congress. The Fed has managed to shift market expectations for future Fed policy rates over the last weeks and bond investors are no longer hoping for a decrease in the magnitude of interest rate increases this year. They are expecting instead a hawkish Fed to increase the key policy rate by 107 bps over the next 4 meetings to a peak of 5.6%! While we salute the normalization of interest rates and the return of cost of capital, we are not ignoring that there will be a heavy costs for these steep rate increases for the US economy and the markets. The US Treasury yield curve is now most inverted since 1981 predicting also a recession to come. We stay defensive in our portfolios and short duration.