What does the bond market know that the Fed isn’t telling us? The Fed sees short-term interest rates over 5 percent, but the bond market says that’s too high, expecting that short-term rates will top out at 4.5% in 2023. Who’s right?
| Stubborn doesn’t seem like a strong enough word, but that’s how Fed officials are describing inflation.
Inflation’s “stubbornness” has been on full display in recent weeks: First, the Producer Price Index (PPI) showed that costs remain high for producers of goods and services. Then in September’s more widely followed Consumer Price Index (CPI) high prices continued to persevere. To address inflation, the Fed’s primary tool is short-term interest rates. As it pushes rates higher, the Fed aims to slow the economy by raising borrowing costs. As economic activity cools, the Fed expects to see the CPI and PPI trend lower. In the table below, you can see what professional traders anticipate will happen with interest rates over the next year. They expect the Fed will have to raise short-term rates to nearly 5% in 2023 to lower inflation. |
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| We know this year has had its ups and downs. Just when it appears to have turned a corner, something else happens, and the financial markets are under pressure again.
You may have heard the old saying: “Don’t worry about the horse, just load the wagon.” Now is an excellent time to stay focused on what you can control, like your “wagon,” and we’ll keep an eye on the “horses” in the meantime.
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