manassanant pamai
Summary
- Economics 101 would suggest that the Fed may hike rates to the range of 5.0% to 5.25% because inflation is arguably still too high.
- But the Fed’s thinking will not only be informed by inflation but also by politics, financial stability, and economic growth consideration.
- Reflecting on the recent stress in the banking system, the Fed cutting rates has become very likely, in my opinion.
- Markets, according to SOFR futures, are already pricing aggressive rate cuts, seeing rates approximately cut by half within 24 months.
- If the Fed cuts rates, history suggests that equity markets will rally, and I see the S&P 500 topping 4,300 by year-end.
All eyes are on the upcoming FOMC meeting, which is scheduled for 2-3 May. And while Economics 101 would suggest that the Fed may hike rates to the range of 5.0% to 5.25%, because inflation is arguably still too high, investors should consider that the Fed’s thinking will not only be informed by inflation, but also by politics, financial stability and economic growth consideration.
Markets are not stupid: they are perfectly aware that inflation is not beaten for good; but they also understand that there is now a very high probability that the Fed will shift its focus towards overweighting financial stability considerations when making a decision on the third of May.
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