What does it mean?
The eurodollar curve has fully priced in an FOMC interest rate hike in December 2022.
That's in stark contrast to Fed forecasts and messaging so one side has to be wrong. Normally that would be the Fed but maybe the rules of the game have changed.
What the bond market might be seeing is +2% inflation in December 2022 and a strong economy. Normally, that would be the start of a hiking cycle.
But the Fed says it will act differently this time. Virtually every Fed official has promised to run it hot for awhile. We'll also need to get through some tapering and withdrawal of fiscal stimulus to get to the point where hiking is appropriate.
You could also argue that the bond market is pricing in tail risks. We've never lived through economic shutdowns and a pandemic. We don't know how it will turn out. So far, everything has been far stronger than expected. Congress is about to add $1.9 trillion to that (ok, maybe $1.7T) and another $3 trillion could be coming before year end. Come August it's could very well feel like the best economy of our lifetimes. It will be a boom.
The base case is that it recedes but maybe it doesn't and maybe wages start to rise. If that's the case, then the Fed could find itself well behind the curve.
From where I stand, no one really knows. It could be a short-lived boom, it could last. I don't see how anyone can forecast it with any kind of confidence. We'll just have to wait and see.
