Fidelity: The future is in the hands of the Fed

It seems that in the United States, the Fed intends to raise interest rates significantly above the neutral level in order to curb inflation. Fidelity does not expect a turnaround until there is a significant deterioration in hard data, particularly inflation and the labor market. The US housing market is already showing signs of tension, as higher mortgage interest rates and reduced purchasing power of buyers are stifling market activity. However, inflation and the labor market are still strong, prompting the Fed to continue, especially since it underestimated the importance of inflationary pressures last year, so it is now focusing more on current spot data. In this situation, one of the most important concerns of Fidelity experts is that the Fed pays too much attention to retrospective data, especially regarding the labor market, even though by the time it shows signs of weakness, it may already be too late for the American economy.

Real interest rates have been positive for some time and are approaching pre-Global Financial Crisis (GFC) levels in some parts of the yield curve. We have repeatedly said that the financial system (due to the high debt stock) cannot tolerate positive real interest rates for a longer period of time, because this may endanger financial stability. With liquidity and assets already under significant pressure, the system may begin to crack. There is a danger that if the Fed follows through on what it is now promising and doesn’t stop until inflation returns to close to 2%, something worse could turn out of a “normal” recession.