If we are right that both the pace of economic activity and corporate earnings are still fraught with near-term, downside risk, equity values and risk spreads will carry a recession uncertainty premium for some time -- a premium that the Fed will still want to counter.
We now expect the Fed to increase the federal funds rate to 5.25% by September rather than stop at 5%.
We believe the Fed will move further to contain future inflation risks.
Upside inflation risks may require that the Fed move promptly and perhaps a little more forcefully to ensure that inflation and inflation expectations stay low.
Fed policy makers made a statement that they want to really underpin the recovery. They've seen the downside risks and they want to make sure that low inflation and disinflation does not morph into deflation.
The U.S. stock market is pricing in a hard landing, an acceleration of inflation and a Fed that may or may not come to the rescue. Part of that message is emanating from the bond market and part of it is coming from some thick smoke signals that the banks are sending.
The balance of risks now suggests that the Fed is not likely to move to the sidelines until the funds rate reaches that level,
The Fed truly wants to get inflation somewhat higher -- back into the comfort zone. Why not say where that comfort zone is?