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. Download PDF
Fed Seems Confident in Soft Landing, But We See Risks The Federal Reserve forecasts only a modest uptick in U.S. unemployment next year as inflation cools, but history and current labor market trends make us less certain.
ECB Prioritizes Fighting Inflation Above Avoiding Recession The European Central Bank is likely at or very near its peak policy rate, but we don’t expect rate cuts in the near term.
BOJ Moves Toward Phasing Out Yield Curve Control The Bank of Japan announced changes that could allow its yield curve control program to expire gradually, if economic conditions are favorable.