How will global investors react to the overriding message from the Central Bankers Lovin-in at Jackson Hole? Aussie markets were 2% down on Monday morning.
Federal Reserve Chair Jerome Powell’s stern message was that interest rates are going higher for longer in a painful fight against inflation. Be clear, he quashed thoughts that the trajectory of monetary tightening could soon be tempered.
Investors now see the Fed’s policy rate peaking in March at around 3.80% and pared bets on a decline in 2023. The US yield curve between the five and 30-year maturities inverted for the second time this month, while the gap between the higher two-year yield and the 10-year rate widened.
The inversions suggest the bond market anticipates a recession is the necessary sacrifice to get price pressures back under control. Though I note already, some bank economists are saying, this is all talk, because the bond market hardly reacted.
Expect to hear more on the trade-off between higher rates of inflation and higher unemployment, and whether the 2-3% targeting which has become a cornerstone of Central Bank doctrine is relevant. Meantime, other than commodities, and the USD, there is nowhere to hide – and Bitcoin came down in sympathy.
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