The markets are right to be sceptical of claims that the Fed could begin its tightening cycle with a “shock-and-awe” 50bp interest rate hike next month. At a time when the yield curve is already unusually flat, an aggressive start to the tightening cycle would risk an outright inversion. It would make more sense for the Fed to target a rise in long-term yields, either via quantitative tightening or by increasing the cumulative tightening in the policy rate projected by Fed officials over the next few years. With first-quarter GDP growth tracking at -0.5% annualised and Omicron likely to distort both the January and February employment figures, we also don’t believe the incoming data will support a bigger hike when the FOMC meeting in mid-March.
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