Mind the (rate expectation) gap

Markets are pricing in a liftoff from near-zero policy rates as early as next year, even though the Fed through its new framework has committed to stay behind the curve on inflation. We caution against extrapolating too much from strong nearterm activity data amid a powerful restart. We see a high bar for the Fed to change its policy stance and believe this may be underappreciated by markets. The Fed has reiterated its intention to stay behind the curve on inflation under its new framework that implies inflation overshoots to make up for past misses. Yet this has been met with some skepticism in markets, against the … (full story)

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