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A combination of sustained inflation and mounting recession fears, interlinked with the geopolitical situation, are the main drivers affecting the current and forward-looking macro environments. The bulk of the uncertainty is in the short to medium term.
The first sequence of the double bear markets (in equities and long-term bonds) adjusting to the end of easy money and rising inflation is almost complete. Now, the narrative has changed, with a shift in focus to deceleration of growth vs fears of inflation.
The Federal Reserve hiked the fed funds rate by 75bp to 2.25-2.50%, the second consecutive 75bp rate hike. The Fed rate decision was widely expected. With today’s rate hike, the fed funds rate is within the 2 to 3% range of estimates of the long-term “neutral” rate. However, as Chair Powell reminded us during his press conference, policy needs to go beyond neutral into restrictive territory this year in order to reduce inflation.
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