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Bond Market Reset: What's Next?
After years of low nominal and negative real interest rates, markets are resetting for an era of higher inflation. Major central banks are hiking interest rates rapidly and shrinking their balance sheets in an effort to "normalize" policy. The question hanging over the market is, “What is a normal policy rate?” The Federal Reserve estimates that the “neutral rate”—one that is neither too restrictive nor too easy—is around 2.0% to 2.5%. However, markets are uneasy that high inflation will mean that the Fed needs to exceed this rate, and have priced in a federal funds rate as high as 3% by mid-2023. ... (full story)