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Divergence

As we prepare for the Fed meeting today, where rates will most likely remain unchanged at 5.5%, it is important to understand the divergence between the market view and the Fed models backing their decisions. Investors believe, for the most part, that inflation has pretty much bottomed, and although unemployment is still low, the picture might not be as rosy as the numbers say: participation, immigration and early retirements are affecting the number that looks good at face value, but shows cracks underneath. The Fed, data dependent, is not looking through the same lense; in fact if you look at the chart below, rates are lower than they should be provided they apply the Taylor rule, which has been behind Fed decisisons since 1993. Unless there is exogenous shocks, such as a bank meltdown, or a market correction for example, rate can be at this level for a while. If that is the case, there is some market repricing needed.


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