Morning Notes — Risk/Reward

The consensus narrative expects sustained growth would only encourage the Fed to hike more until the inevitable policy mistakes create a recession. But that narrative ignores the relatively high probability for the Fed to engineer a soft landing. Excess monetary accommodation is responsible for most of the recent inflation spike.  $1.9T in fiscal stimulus at this time last year (poorly timed given already strong growth data) and supply bottlenecks played a role, but excess monetary accommodation is always the primary cause of inflation (too many dollars chasing too few goods). Fed funds remains at the zero bound with the current neutral rate, implied by real yields, closer to 2%.  One can make the case that Fed funds in the 2-3% range would still be accommodative by historical standards. There’s currently ample room for rate hikes without causing a recession.  A sustained recovery with higher bond yields, a positively sloped yield curve and further rotation into cyclical/value equity sectors continues to be the most plausible forecast in the 6-9 month window.