Lari Bat By Bill Zox, CFA and John McClain, CFA Investor obsession with peaks—peak inflation, peak hawkishness, peak bearishness—has shifted to pivots, in particular, a possible Federal Reserve (FED) pivot away from its aggressive rate hikes over the last year. We see that pivot as a three-stage process: downshift, pause, and then rate cuts. The downshift began in December when the Fed hiked 50 basis points after four consecutive 75-basis point hikes. As we write this article, financial markets are discounting 2 to 3 additional 25-basis point hikes during the first half of the year and then a pause. The Fed seems comfortable with this pricing. However, financial markets also are discounting a shift to 50 basis points of rate cuts in the second half of the year and another 100 to 125 basis points of cuts in 2024. The Fed has done nothing to validate the discounting of these rate cuts. Immaculate Disinflation with Rate Cuts Financial markets seem to be placing a higher probability on what some are calling an “immaculate disinflation.” This phrase describes a return of inflation to around 2% over the next year, accompanied by a soft economic landing or perhaps a mild recession […]
