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By Anwiti Bahuguna, Ph.D., Senior Portfolio Manager, Head of Multi-Asset Strategy
The Fed takes a potentially aggressive path in an effort to tame inflation. Investors fear a recession may be on the horizon.
The Fed gets real about inflation
For the last two years, inflation has been a bogeyman for the markets — higher and stickier than expected. To combat higher than expected inflation, the Fed has been telegraphing an aggressive position on hiking the Fed funds rate. Markets are now expecting nine hikes, bringing the central bank’s overnight rate to 2.00%–2.25% by the end of 2022.
Recession fears on the rise
Recession fears became headline news when the yield on the 2-year Treasuries briefly rose above the yield on the 10-year Treasuries. Historically, some yield curve inversions have presaged a recession.
But a single yield curve inversion on its own is an imperfect recession predictor: an…