Fed Thoughts: Will the Fed Swipe Left or Right?
Authors & Contributors
Over the past 70 years, inflation has fallen into long stretches outside and inside the zone of price stability. We break down where to look and what to look for to identify if the Fed will remain firm or ease the public’s concern of the economic state, which can materially shape the macroeconomic landscape and investor opportunities.
High real short rates outside the zone of price stability associate with estimates of the equilibrium real rate drifting higher. Bond and stock prices positively correlate, making fixed income assets a poor hedge for equities and raising portfolio risks. Accordingly, investors should be compensated for bearing that risk in the form of higher term and other risk premiums.
Conversely, the low real rate prevailing inside the zone of price stability pulls estimates of the neutral rate lower. The two main asset classes negatively correlate, working to lower premiums. Supportive of this, the estimate of the term premium on the 10- year Treasury note is considerably higher outside the zone of price stability.
Dive into our detailed analysis to learn more.
