There’s a strong dissent between the Fed and the market on what path offices rates are going to follow over the next 12 months. The #federalreserve expects “higher for longer” and the market thinks the economy is weakening to a point where it will fall into a #recession and the Fed will be obligated to cut aggressively. The chart below shows, in basis points, how much the fed has cut official rates over 12 months following a recession. On average, rates have been cut 300 bps, or 12 cuts of 25 bps. Currently, the market is discounting 81 bps of cuts, almost 4 times less than the historical average. That means that if the US decelerates into a recession, the fed will need to make a major adjustment, since they’re not even considering that scenario, and the market will need to adjust as well, with subsequent impact on asset valuations.
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Source: JPM AM, Bloomberg LP.
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