The Hairy Caterpillar

The market has priced in seven 25-bps hikes this year and two more next year. #Fed tightening is in everyone's mind.

I though reminding people of what we used to call the “hairy caterpillar” chart might be useful: The market has a poor record of predicting the Fed. 1/3 pic.twitter.com/XBKlT0S9ML

— Roberto Perli (@R_Perli) February 15, 2022

Everyone thinks that there will be more hikes than we end up having. We’re all too keen to call the end of the 40-year rally and sell bonds. But … maybe this time is different.

Official expectations are frequently wrong. The path of short-term rates has repeatedly confounded the forecasters. It’s hard to make predictions, and these are definitely about the future, and are measurable.

Image

Marion Morgan dancers, 1918 pic.twitter.com/qJLvjROS0B

— Daniel Brami (@Daniel_Red_Eire) May 12, 2022

Wrap

Tough times ahead for the Old Lady of Threadneedle Street

Adam Posen writes that the UK is heading for stagflation. He has written this in the FT. His argument is that inflation will take off because of international issues (particularly Brexit) but that no politically tolerable increase in interest rates will be sufficient to fix the imbalance in the supply of labour. Posen has form: he’s virulently anti-Brexit, but he has a point. He states that as a small, relatively open economy, we are in a much worse position than the USA.

For me, this signals that the pound will continue to decline. This will push up the price of everything, including labour. Without a Thatcher-style recession, it’s hard to see that inflation will be controlled.