Fed Chairman Warsh stated that he will not provide forward guidance. The fixed income markets should do their own signalling. The combined weights of bond market participants should tell others what they are thinking. The market is speaking, and it is telling us that rates are going higher. The spread between the 2-year Treasury market and the EFFR is widening, suggesting rates will rise for a longer period. The market is expecting the Fed to raise rates to fight inflation. There are no Fed rate cuts expected as desired by the President.
Nevertheless, we have to place the current rate increases in context. It is a return to normal after the QE and ZIRP era. That does not mean the economy will not feel the pain. The cost of capital is ,rising, which means projects will be rejected because they will not be financially attractive.
When the extraordinary continues for too long, it becomes normal, and a return to the true normal becomes abnormal.
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