EXECUTIVE SUMMARY The Taylor rule suggests that further monetary tightening is necessary to address the current bout of inflation. In addition, low unemployment gives the Federal Reserve scope to hike rates further. However, compared with other episodes of inflation since World War II, the sensitivity of the U.S. economy to higher interest rates is exceptionally high. Thus, the Fed faces a dilemma: If it is unflinching in stanching inflation, all risk assets could experience a brutal sell-off; if, as we believe, the cost of controlling inflation is too high, then inflation could remain elevated for longer, which could bolster real assets.
The Fed: Stuck On Hold for Now Despite the reacceleration of inflation and enduring labor market strength, the Fed remains focused on downside risks.
Viewpoints Will the True Treasury Term Premium Please Stand Up? Various methods to estimate this key bond market gauge differ on details but appear to signal rising investor compensation.
ECB: Eyeing a June Rate Cut While the European Central Bank refrained from declaring victory at its April meeting, a June rate cut seems increasingly likely.