The gap between the Fed's projections and Wall Street's expectations could have far-reaching consequences for Americans' finances as well as for the economy.
Nearly a year into the Fed’s drive to quash inflation by hiking interest rates at a blistering pace, investors still don’t seem to fully believe what the Fed warns is coming next:Wall Street has a more sanguine view: With inflation, investors are betting that the Fed will stop hiking rates soon, pause for a bit and then start cutting rates toward the end of the year to combat what many on Wall Street expect will be a mild recession.
If, on the other hand, the Fed follows through on its warnings of still-higher rates, the economy might not only tip into recession but could endure a deeper and longer one than would have occurred if it had followed the market's path instead. Wall Street investors seem confident that the Fed has largely whipped inflation, which would make additional rate hikes unnecessary. By some measures, investors think inflation could drop to nearly 2% — from 6.5% now — by the end of this year, according to Deutsche Bank. The Fed's policymakers, by contrast, have collectively forecast that inflation will still be 3.1% by year's end.
“Markets have become very used to their easing policy at the first sign of trouble,” said Gennadiy Goldberg, senior interest rates strategist at TD Securities.
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