Too early for a Fed pivot

The flattening of the US yield curve will depend on the persistence of core inflation and on the impact of monetary tightening on growth. The more resilient the US economy proves to interest-rate hikes, the more aggressively the Fed will have to tighten monetary policy, thereby increasing the risk of recession. We have gone from ‘bad news is good news’ to ‘good news is bad news’.

For the Fed it is still all about inflation. The Fed remains much more concerned about the risk of inflation expectations becoming unanchored than about downside risks to growth. The Fed is determined to act to bring inflation back to target:

  • The committee sees resilient underlying growth and persistent inflationary pressures. According to the Fed, “this is a strong, robust economy.” Despite the growth slowdown, the labour market has proved tight, with the unemployment rate near a 50-year low, job vacancies close to historic highs, and wage growth elevated. Inflation is running hot. At their September meeting, FOMC members revised up their median core inflation forecast for 2022 and 2023 by 0.2pp to 4.5% and by 0.4pp to 3.1%, respectively. They left their 2024 forecast unchanged at 2.3%.

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