A note from BlackRock a little earlier this week ICYMI. On the Fed:
- The Fed’s updated “dot plot” of the Fed funds projection shows it’s ready to push rates to nearly 4% by next year (red line, left chart). This takes rates well beyond neutral of around 2.5% – the level that neither stimulates nor decreases economic activity. Yet the Fed continues to forecast trend-like growth (red line, right chart). Financial conditions are already quickly tightening. And with growth slowing elsewhere and higher energy prices, we expect a worsening macro environment for the rest of the year and into 2023. The Fed isn't looking for a recession, even though in our view one would be needed if it wanted to drive inflation back down to 2%. So we expect the Fed to change course once it becomes clear growth has stalled.
And, on the European Central Bank :
- How does the inflation/growth trade-off play out elsewhere? We think the European Central Bank (ECB) will be forced to confront reality sooner because the euro area will feel economic pain sooner. The ECB’s planned policy normalization underappreciates the risk of the energy crisis pushing the euro area into recession. The ECB’s troubles are seen in the peripheral bond volatility that sparked an emergency meeting last week to help steady financial conditions across the euro area.
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