The market will test the Fed. The Fed will win.
- In coming months, the market may confuse the Federal Reserve’s increasing bullishness on the US economic outlook with hawkishness on rate expectations.
- We expect volatility in financial markets as investors overestimate how soon monetary stimulus will be withdrawn. − In our view, this would be premature, as it will take time to develop persistent inflationary pressures and return to full employment.
- We have strong conviction that the Fed will successfully push back against any sharp increases in rates and tightening of financial conditions by reaffirming its commitment to providing support until the recovery is complete.
- This means episodic volatility will serve as opportunities to add risk, as the outlook remains bright in light of progress on vaccinations and still-accommodative monetary and fiscal stances.