Source: Unigestion, US Federal Reserve, Bloomberg, as of 25 June 2021.
When assessing monetary policy mode, it is important to differentiate between the “end of easy money”, which defines the start of a tightening cycle, and the “end of easing”, which marks the end of a rate cut cycle. In the first regime, the cost of borrowing increases and should rise in the future. In the second, this cost stops falling but should remain at a low level for some time. Historically, the “end of easy money” has led to a repricing of both inflation and growth premia that negatively affects most assets and can trigger a correlation shock if the shift was not well publicised, as in 2013 or even at the beginning of 2018. Conversely, the “end of easing” means that financial conditions remain favourable. We believe that recent Fed communication reflects an “end of easing” mode, rather than a clear shift into an “end of easy money” regime.
This is highlighted in our chart which compares Fed dot projections for the end of the next two years and the rate projections implied in market pricing represented by the forward OIS USD 1Y rate in 2023. As can be seen, despite the adjustment in the 2023 dot projections, the short-term interest rates forecasted by Fed members remain lower than the market forecasted rate.
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