At this point, one must wonder what the Fed is trying to pull off, and it isn’t entirely clear to me. It seems like the Fed is taking a big gamble here on inflation hotter than not.
That isn’t my opinion; that’s the bond market’s opinion based on things like inflation swaps and breakevens.
The Fed upgraded its GDP forecast, raised its core inflation estimates, and left the median dot at 4.6%. But in the meantime, it took rate cuts away from 2025 and raised its long-term run rate to 2.6% from 2.5%. It’s just odd once again.
It will be interesting to see how the market responds to all of this today once we get past all the changes in positioning. The implied volatility crush that I noted was likely to happen yesterday pretty much happened on schedule, with the big move happening around 2:35 PM ET.
This has been a predictable thing for years now, and when it is predictable for this long, it tells you that is all the market is responding to and nothing more. Yesterday, the options market was pricing about 75 to 80 bps moved up or down yesterday, so we finished higher by 89 bps.
When you look at the dot plot, you wonder why the yield curve is still inverted at this point. The economy looks pretty healthy.
At some point, shouldn’t the yield curve steepen? Shouldn’t the 2-year rate fall or the 10-year rate rise? It is something to watch because, at least right now, the curve steepened by seven bps and seemed to break a downtrend.
Meanwhile, 5-year inflation expectations crept higher yesterday and are sitting below resistance with the potential to break out. This is just a spread that measures the difference between the real rate and the nominal rate, and inflation expectations rise as the spread widens.
It would seem that if
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