Fed: Markets ignoring tightening – Deutsche Bank

George Saravelos, Strategist at Deutsche Bank, points out that we have regime shift in play reflected in the market persistently ignoring Fed tightening in both action and words.

Key Quotes

“The key to understanding this behavior is that unlike other central banks the Fed is approaching its own assessment of the nominal neutral rate at 2%. While this is not priced for next year, the market is already priced for a terminal rate slightly below 2% further out the curve. Even if the tightening happens sooner rather than later, the crux of the argument is that unless the market believes the Fed is running behind the curve (eg. US inflation acceleration) tightening will continue to look more like easing: the more the terminal rate approaches, the higher the odds of a Fed “pause” or “time out” until the productivity or inflation pictures improve more.”