Bond Traders Are Relying on Wishful Thinking
Investors don’t seem to understand why the Federal Reserve hiked interest rates, despite a softer economy and lower inflation.
Instead, the market is priced for fewer rate increases than the Fed projects. Moreover, investors seem to think inflation will remain benign, while higher rates might jeopardize the expansion and force the central bank to reverse course. In contrast, Chair Janet Yellen could not have been clearer in warning that inflation might rise, and the recent moderate reports could be aberrations. Her projections imply she relied on economic theory, while investors seem inclined to dismiss her analysis and rely on wishful thinking instead.
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