2024-03-27 05:44:31 ET
Summary
- The Fed is likely at the peak dovishness given the expectations of three cuts in 2024, despite higher inflation and stronger growth.
- The Fed will be forced to delay interest rate cuts until November, and by then, the economy is likely to be in a recession.
- Alternatively, if the Fed cuts in June without support for "the inflation bump thesis", the bond market could sell off as inflation expectations de-anchor.
- Either way, the S&P 500 is facing a major correction, and the recent weakening in the momentum could be in anticipation of the Fed's hawkish turn.
The dovish pivot in November
The Fed started to make a dovish turn in November 2023, when the Fed speakers suggested that the Fed could start cutting interest rates before inflation returns to the 2% target, as long as the disinflationary process continues.
Essentially, as inflation decreases the real Federal Funds rate increases and becomes more restrictive on the economy - which could trigger a recession....
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For further details see:
The Peak Fed Dovishness - That's Negative For The Stock Market