Room for policy errors
Apr 27, 2023
The market-implied Fed rate 18 months is currently 1.8% lower than the current Fed rate. Hence bond investors believe that a/ peak rates are behind us and b/ the Fed will be forced to cut rates aggressively. The gap between market implied rates 1 ½ years from now and current rates has not ever been as wide over the last 37 years. In case the Fed would not start to cut rates soon, it would be considered a big disappointment for the financial markets. Not often has the room for policy errors by the Fed been as big !