Back to Normal
Fed officials will likely cut rates again on Wednesday, moving the Fed Funds rate to a range between 4.25 and 4.50. We think the Fed wants to get this rate between 4.00 and 4.25, but with inflation turning up, the timing of their next move may be in question. Perhaps a long pause is warranted.
The Cleveland Fed’s live inflation forecasting model clearly shows that inflation is on the rise. The graph below shows this upward turn, and this is in an environment where ‘energy’ costs and ‘goods’ costs are falling.
In addition to the current inflation environment, the new administration will begin implementing new fiscal policies soon. Deficit spending, on shoring, and immigration reform, all will likely pressure inflation higher.
Given this backdrop of Fed easing, current inflationary pressures, and future inflationary fiscal policies, we see the curve normalizing. The short end will likely continue its trend to 4% and the ten-year will likely trend to 5%.
Back To Normal.
