That was according to analysis from rates strategists at the Bank of America. If financial asset prices go up, the Fed would find it hard to lower inflation. Inflation typically falls after a sustained period of reasonably tight financial conditions FCI or an acute financial conditions shock, according to strategists led by Mark Cabana.
They point to a chart overlaying the Chicago Fed's measure of financial conditions with a measure of inflation, called the trimmed mean. The market wants to believe that the peak hawkish Fed is past. We are skeptical. They add that you should be watching for another hawkish dose at Dec FOMC. The S&P 500 SPX, down 25% on the year, is now down only 15% on the year. The terminal rate is expected to be reached in March or May, and the market is expecting a first full cut in November. They say that gap between peak and first cut isn't unusual, though seems short relative to cycles after 1995. The extent of cuts priced afterward is some 170 basis points worth in 1.5 years. The market is skeptical of the Fed's higher message, as evidenced by heavy cuts post terminal, the strategists say. There are two ways the Fed could address this skepticism - one would be by using the dot plot and putting the 2024 dot over the 2023 dot. Another would be giving forward guidance on inflation and unemployment, by saying it wouldn't cut rates until core PCE inflation was equal or below 3.5%. The strategists don't think the Fed will adopt either approach. The strategists say that the premature pivot concerns will build, lower real rates, and that a higher Fed terminal rate is likely to flatten the curve. The yield on the 2 year Treasury TMUBMUSD 02 Y was 4.32%, and the yield on the 10 year TMUBMUSD 10 Y was 3.52%.