The bond market already has hiked rates to 3%. The Fed is playing catch up but will get there in the coming 3 months. What they do from there will determine whether we get a FY23 recession. If the Fed focuses on backwards data via a rear view mirror they probably will hike 2x too much. If they focus on forward looking data, they will probably see that a lot of demand has already been destroyed, inflation is coming down, and bond yields have stabilized. A lot of commodity prices have rolled over already and have headed lower. Add to that list of lower prices “US service PMI” – a measure of the price of services. Those prices peaked in 1Q and are down sharply since. The reading on this data is usually in the 50s so a reading of 60 is still elevated – but a long way from 74 which is where it was in 1Q22.
The moment of truth in all of this will likely come in late September or early October when the Fed utters the magic phrase: “we’re pausing on rates for now”.
FTF = follow the Fed

Richard Barrett
Chief Investment Officer
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