Markets want a “Fed Pivot” and they may get a “Fed Pause” instead: The MUFG Global Markets Podcast

In today’s episode, MUFG Head of U.S. Macro Strategy George Goncalves continues to suggest that the markets’ belief that the Fed has or is about to pivot is just wishful thinking and is more a narrative being used to explain the markets performance as of late. George thinks that inflation remains the Fed’s main focus. Even if the assumption is that the peak in headline inflation is behind us, so long as core PCE inflation stays elevated, it’s a binding constraint for them. Thus those in the marketplace expecting the Fed to dial back its hawkishness and/or eventually flip into easing in 2023 might be getting ahead of themselves.

In many ways George suggests the recent financial conditions easing during the summer of 2022 will require the Fed to lean further into tightening if they truly want to become restrictive. We expect rates to get deeper into the 3% range for the base rate soon and if max-QT in September/October does not result in a material tightening of financial conditions, the Fed may have to lean even harder to get their desired results on reigning in core inflation via slowing down aggregate demand. At a minimum the longer it takes for inflation to get to the Fed’s 2% target, it’s likely they don’t pivot but instead pause at a higher rate level.

Disclaimer: www.mufgresearch.com (PDF)