Market Extra: Financial markets seen unprepared for risk that inflation resists Fed rate hikes in second half of 2022

by | Jun 28, 2022 | Stock Market

Investors and traders attempting to navigate one of the most treacherous periods in financial markets in years are all but sure to face more volatility during the second half of this year. One major reason is that few seem to be prepared for the risk that U.S. inflation, already at an almost 41-year high of 8.6% as of May, could prove to be stubbornly resistant to rate hikes by the Federal Reserve. It’s a dynamic that’s played out time and time again during past periods of high inflation in the U.S. — in the 1970s under then-Fed Chairman Arthur Burns; the late 1970s during the short tenure of his successor, G. William Miller; and even in the 1980s under Paul Volcker.Read: History shows inflation can take years to return to normal even when the Fed hikes interest rates above 10%Broadly speaking, financial market participants are increasingly looking for inflation pressures to ease. That’s evident in fed funds futures trades that now predict the central bank will hit the peak of its rate-hike cycle around next March — when the Fed’s main policy rate target could go to between 3.5% and 3.75% or higher, versus its current level between 1.5% and 1.75% — before policy makers cut rates next year.

Expectations for cooling price gains can also be seen in 5-, 10- and 30-year break-even rates trending below 3%, according to Tradeweb — levels which imply the Fed will ultimately win its war on inflation. And hope can even be found in the greater weight that investors are giving to a possible U.S. r …

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